Exempt Organizations and Key Employees

July 1, 2015
Exempt Organizations and Key Employees
Ritva Williamson

Our clientele includes a multitude of tax exempt clients. We do their audits and tax work and one of the often asked questions is the definition of a key employee. Who is and who isn’t?

The exempt organizations must list all of its current officers, directors and trustees, regardless of whether any compensation was paid to such individuals. In addition, an exempt organization must determine and list the five highest paid employees who received reportable compensation more than $100,000 from the organization and related organizations. And, special rules apply to former officers, directors, trustees, and key employees.

The term “Key Employee” has several meanings depending on how, by whom, and in what context it’s being used.  While the Internal Revenue Service uses the term, or similar terms, in several Code Sections and Regulations, the rules for the exempt organizations are quite different.

A “Key Employee” for the purpose of tax exempt organizations is one who is not an officer, director, trustee or a highly compensated employee.

According to the IRS, and for the purpose of determining who must be listed as a current “Key Employee” on the Form 990, all the following three criteria must be met.

  1. Compensation test: The employee receives reportable compensation in excess of $150,000 during the calendar year ending within the organization’s tax year. Reportable compensation includes compensation from all related organizations.  
  2. Responsibility test: The employee has all the responsibility, power and influence over the organization as a whole.  And/or, the employee manages a discrete segment or activity that represents 10% or more of the activities, assets, income, or expenses of the organization.
  3. Top 20 test: The employee can or has the ability to control or determine 10% or more of the organization’s capital expenditures, operating budget, or employees’ compensation.

In a nut shell, any employee, other than those listed as officers, directors, trustees, or highly compensated employees, may have to be reported as a Key Employee. The first question should be:  is the reportable compensation greater than $150,000?    

While so many employees are key employees in terms of their responsibilities and contributions to the organization’s success and hold important and valuable positions, they may not fall under the key employee definition as described by the regulations.

Should you need any help or assistance regarding tax exempt organizations’ taxation, please contact us.