Tag: Nonprofit salaries

Does Nonprofit “Good Governance” Lead to IRS Tax Compliance?

Posted on | by ERI

The Exempt Organizations division of the IRS thinks so, and has some preliminary evidence to back up the assertion.  In a recent speech, EO Director Lois Lerner disclosed some current research results and plans for a more comprehensive look at the link between organizations that are well governed and their likeliness to be compliant with tax law.

For the past few years, all IRS compliance checks included a check sheet on governance practices for the organization.  Obviously, the roughly 1,300 organizations in this group had already been selected for a check for reasons unrelated to governance, so it is not a statistically representative sample of nonprofits.  But the analysis of some key data points shows interesting results.

Organizations are more likely to be compliant if they:

  • Have a written mission statement,
  • Always use comparability data when making compensation decisions,
  • Establish procedures for the proper use of charitable assets, and
  • Have the Form 990 reviewed by the entire board of directors.

This initial analysis covers only 501(c)(3) public charities that were already selected for exam based on other criteria, but, according to Lerner, does provide some possible indicators of tax compliance.  And now an IRS strategic planning group is developing a proposal to expand the data analysis to a statistically representative sample of all nonprofits.  The IRS hopes to have the data to support its premise that good governance leads to good tax compliance.

In the meantime, filling out the governance questions on Part IV of the Form 990 is important to the IRS, and “wrong” answers in this section (for example, no comparability data used for compensation decisions) could end up leading to a review.  It is hard to envision a successful organization that does not have a written mission statement and procedures to protect assets.  A review of the Form 990 by the entire board is easily implemented.  Even comparability data are easily available — the demonstration version of ERI’s Nonprofit Assessor, available at www.erieri.com, provides executive salary comparability data at no cost, which is adequate for the vast majority of nonprofits; larger organizations may want to purchase the Professional version which provides more detailed information. This is the same software used by IRS to check compensation levels; nonprofits can view the same analysis as the IRS compliance staff.

The IRS is always looking for ways to identify efficient ways to use its limited compliance resources.  Nonprofits may not only improve their chances of success, but also lessen the probability of an IRS investigation by implementing some simple good governance practices.

Whither Form 990 E-filing – or Is It Wither?

Posted on | by ERI
If you have ever wondered why nonprofit issues and compliance do not appear to be top priorities with the IRS, just review the statistics presented in an article in the most recent issue of the Statistics of Income (SOI) Bulletin – Winter 2012, published quarterly by the SOI, the research division of the IRS.
Brett Collins, author of Projections of Federal Tax Return Filings: Calendar Years 2011–2018, estimates that about 237 million tax returns are expected to be filed in 2011 – of these, about 741,000 will be Forms 990, 990-EZ, and 990-PF. Thus, not only is there very little money to be gained in working on nonprofit compliance, but the 990 series represents only about 0.3% of the total returns filed. Another 480,000 organizations will file the electronic post card, the 990-N – these are the very smallest entities with less than $50,000 in annual revenues.
Now about 77% of all individual income tax returns are e-filed, and that is projected to rise to 84% in 2018. When e-filing reaches these levels, the processing of the data is less of a burden for the IRS.
While the IRS tries to manage its ever increasing work of processing data by encouraging (and requiring where possible) e-filing of returns, the expectations are discouraging for the nonprofit sector. The number of Forms 990, 990-EZ, and 990-PF filed in 2018 is projected to increase by about 14% from 2011. The percentage of e-filing is expected to rise also, but only to 38%, not nearly the level for individual tax returns (84% in 2018), or corporation returns (55% in 2018). The table below breaks out the estimates by type of return.
Type of Return
Estimated 2011
Projected 2018
Total Forms 990, EZ, PF
741,200
842,600
990, EZ, PF e-filed
203,100
321,500
% of total e-filed
27%
38%
Total Form 990
401,700
448,100
990, e-filed
113,900
175,500
% of total e-filed
28%
39%
Total Form 990-EZ
222,500
264,500
990-EZ, e-filed
73,600
114,200
% of total e-filed
33%
43%
Total Form 990-PF
117,000
130,000
990-PF, e-filed
15,600
31,800
% of total e-filed
13%
24%
The Forms 990 now serve as the major public source of information about an organization’s finances, governance, operations, and programs for federal regulators, the public, and many state charity officials. Supported by nonprofit sector groups such as Independent Sector (see https://www.independentsector.org/efiling_form_990?s), e-filing actually promotes accurate Forms 990 as the preparation software detects incomplete and potentially inaccurate information before returns are filed. It also allows the IRS to provide immediate feedback to organizations about incomplete returns and those with obvious inaccuracies.
The IRS currently requires larger organizations – with assets of more than $10 million – to e-file if they filed more than 250 returns (including W-2s and other returns). Private foundations that file at least 250 returns are also required to e-file Form 990-PF, regardless of total assets. And, of course, the five-question Form 990-N postcard is available only electronically, and must be e-filed by the very smallest organizations in the sector. The vast majority of the nonprofits are not required to e-file – software is used to prepare their returns, then they are printed and mailed to the IRS, where they are scanned and turned into images for distribution, a time consuming and expensive process that does not result in data usable for research.
The impediment to requiring e-filing for all is a provision in federal legislation from 30 years ago designed to reduce filing burdens for smaller entities, not just nonprofits. However, with the dramatic change in how computers are used from the 1980s to the present, e-filing for all organizations is not a burden and is generally supported in the nonprofit sector.
Making this necessary legislative change to require organizations to e-file should be a priority for all those interested in the nonprofit sector. Because of the limited resources of the division of the IRS in charge of the nonprofit filings, the forms were deemed to be public, thus allowing all stakeholders – the media, watchdog groups, funders, etc. – to be part of the enforcement process. But, when there is a long delay in providing these public documents and they are in a format that is difficult to use, the purpose of making them public is not met. Making e-filing a requirement would allow the IRS to use its resources more effectively and encourage the creation of a system to disseminate the data in a usable format in a timely fashion.
The Debate Over Teacher Pay_Graphic

The Debate Over Teacher Pay – Too High or Too Low?

Posted on | by ERI

As public budgets tighten, the teacher salary debate has recently gotten more heated. While most researchers seem to agree that higher teacher quality translates into improved student performance, does higher pay necessarily bring the best and the brightest to the profession?

A recent London School of Economics blog reported on research by Professors Peter Dolton and Oscar Marcenaro-Gutierrez that compared teacher pay and where it fits in the national income distribution with student achievement in the various OECD countries.  They found that higher teacher pay tends to lead to the desired better student performance and also tends to attract more able graduates into the profession.  When teaching attains a higher standing in a country’s income distribution, the national status of teaching as a profession is enhanced. The end result of this higher pay linked with higher status as a profession tends to be a positive impact on student performance. (Read more)

Meanwhile, in the US, Andrew Biggs and Jason Richwine from the Heritage Foundation found that teachers were overpaid in Assessing the Compensation of Public-School Teachers.  They conclude that public school teacher pay is comparable to the pay of similarly skilled private sector workers, but that more generous fringe benefits for public school teachers, including greater job security, make total compensation 52 percent greater than “fair market” levels.  They claim this is equivalent to more than $120 billion overcharged to taxpayers each year.  They suggest that teacher compensation could therefore be reduced with only minor effects on recruitment and retention. Alternatively, teachers who are more effective at raising student achievement might be hired at comparable cost.

Researchers at the Economic Policy Institute (EPI) were quick to respond.  EPI’s analysis found that average weekly pay of teachers in 2003 was nearly 14% below that of workers with similar education and work experience, a gap only minimally offset by the better nonwage benefits in teaching. In fact, teacher earnings have fallen below that of the average college graduate in recent decades, losing considerable ground during the late 1990s, as earnings of college graduates grew 11% relative to the much lower 0.8% growth in teacher earnings.  See How Does Teacher Pay Compare?  EPI also analyzed the data sources and statistical methods used in the latest Heritage Foundation study and found serious problems with the report and its conclusions (click here for details).

Again, if effective teachers are the most important resource schools have for improving the academic success of their students, reducing teacher pay is not going to have the desired result on student performance!

To add some perspective to this issue, check out Jon Stewart’s opinion on teachers’ pay.

Senator Grassley Requests Examination of Public Charity Definition

Posted on | by ERI

At the Senate Finance Committee Hearing, “Tax Reform Options: Incentives for Charitable Giving” on October 18, 2011, the ability for individual taxpayers to deduct charitable contributions was the major focus, as the search for additional sources of tax revenue and discussion of tax reform are getting serious in these tight economic times.

Over the years, there have been various proposals for changing the current system, as legislators try to balance the cost in lost tax revenue with the adverse impact of a change on giving to charities. The Joint Committee on Taxation prepared a paper outlining the current system and its history and discussing the potential impact of various proposals (expanding the charitable deduction to all taxpayers with a 1% floor; adding a floor but converting the tax deduction to a credit; capping itemized deductions, etc.). This is a must read for charities that receive a large proportion of their revenue from individual donors.

Iowa Senator Chuck Grassley, while supporting the current system of deductions at the hearing, also requested that the committee examine the types of organizations that benefit from the incentives for charitable giving, regardless of how the incentive is structured. His concern was that the deduction for donations of cash and publicly traded securities to public charities is now limited to 50% of adjusted gross income and 30% for other non-cash donations. These percentages drop to 30% and 20% if the donations are to a private foundation. So if an organization changes its status, donors will be able to increase their tax savings.

While this may sound obscure, Grassley’s research shows that since tax-exemption rules were significantly changed in 1969, there has been an explosion in asset-accumulating public charities that are not subject to pay-out requirements or the other private foundation rules, such as restrictions on self-dealing and excise taxes on investment income. He has included examples of subsidies provided to donors, in his October 17, 2011, letter to the Treasury and IRS. He states that this charitable loophole results in a big subsidy from taxpayers to a few already rich individuals and very little money for charities.

The discussion of the costs and benefits of the charitable deduction is not a new one, but Grassley’s call to examine what he calls “the increasingly blurred line between public charities and private foundations” adds another dimension to the ongoing debate. The need for federal revenue is clearly a major factor in driving tax reform, but it is certainly unclear what any reform might include at this time, and how it might impact charitable giving.

An End to the Form 990 Revision Process – Mostly!

Posted on | by ERI

Form 990 revisions started by the IRS in 2007 (incorporated in the 2008 Form 990, typically filed in 2009) are at last final! Form 990 had not been significantly revised since 1979, and both the IRS and those having to file the form and use the data were in agreement that major revisions were needed to reflect changes in the law and with the increasing size, diversity, and complexity of the tax-exempt sector. The redesign was a collaborative process with a public comment process that included more than 800 comments. These final regulations represent a milestone.

For those concerned with compensation, there were many important changes in reporting requirements, including new threshold amounts for reporting compensation and a requirement that compensation be reported on a calendar year basis, whatever the fiscal year of the organization. See all of the details in the instructions and in the Form itself here. Each year, the IRS provides a summary about all the changes from year to year. Click here for the 2010 details.

While Form 990 is done, Form 990-PF for private foundations and Form 990-EZ for smaller nonprofits remain unrevised. The IRS has said that prospects for changes in these forms are going to be done in the near future because of budget constraints.

And don’t expect the minor changes in Form 990 to end — the IRS continues to refine and address issues with all of its forms on a continuous basis, so while these major revisions are done, all filers have to read the instructions carefully each year.

Technically Speaking… Does Excel Always Know What is Best For Your Compensation Data?

Posted on | by Christopher Chasteen

The use of Microsoft Excel in the business compensation environment for performing quick and easy calculations has become ubiquitous, making the need to cite usage statistics pretty much meaningless. I often cut and paste data into a spreadsheet for some quick compensation data analyses, even when I have much more powerful statistical software packages at my disposal.

It was during one of these exercises that something odd in my Excel spreadsheet jumped out at me. I was reviewing a long list of salaries for Non-Profit Executive Directors, focusing on the 10th percentile, and the values reported by Excel were, in my opinion, well, illogical.

So, I tried an experiment comparing the results from Excel 2007 to my “powerful” statistics software (SAS 9.2). I then discovered the SAS software has five different algorithms for calculating percentiles, while Excel presents a single result.

Rather than start with a long list of salaries, I started small. I went to the Internet and grabbed the first 35 numbers in the Fibonacci Sequence. I ranked them in order and just took a guess at what the 10th percentile might be.

With 35 numbers, N/10 = 3.5, and I came up with two guesses at the 10th percentile; either the 4th number in the sequence (which is 2) or, if interpolated, halfway between the 3rd and 4th numbers (which is 1.5). I decided my best answer would be 2.

Let’s take a look at the actual results.

All five SAS results fall in line with my original guesses (between 1.5 and 2). However, Excel reports the percentile falling nearly halfway between the 4th and 5th numbers – the difference is up to 60% in this example!

What is going on? Well, Wikipedia[1] notes that Excel uses an “alternate” method to calculate percentiles. While these numbers are small, just a 0.9 difference, think about it in terms of salary planning. Multiply these numbers by $10,000, and now that 10th percentile is off by an amazing $9,000!

Conclusions? Well, first, I will be very cautious using Excel to calculate percentiles. The fact that this discrepancy was obvious in a list of actual salaries does lead me to recommend when analyzing important data using Excel, take the time to ensure the results make sense. Attributing a $9,000 discrepancy to Excel’s quirky percentile algorithm may not get you very far.

Of broader concern is that Excel doesn’t provide any information in Help, or elsewhere, letting me know what choices it is making for me in regard to my data. I had assumed that it just knew what was best and, by not giving me any choices or even documenting the option it uses, I had no reason to question its authority. Now I do.

1 Wikipedia – Percentile. Retrieved 6 June, 2011 from http://en.wikipedia.org/wiki/Percentile

Reporting Nonprofit Compensation on the Form 990 – Which Form Should Be Used?

Posted on | by ERI

What nonprofits must disclose to the IRS about executive compensation depends on which version of the IRS Form 990 (the annual report required of most tax exempt organizations) must be filed. What’s more, the form needed may have changed recently.

Even the very smallest nonprofits must now file annually, even though it may involve a very short postcard. For the past few years, the IRS has changed the thresholds of financial activity that triggered filing the full Form 990 rather than the short form, called the Form 990-EZ, as the major revision in Form 990 was phased into use. As always, churches are given automatic tax exempt status and are not required to report to IRS annually.

What triggers the use of the more complex Form 990 versions and thus the more detailedcompensation reporting level of “annual gross receipts,” defined by the IRS as the total amounts the organization received from all sources during its annual accounting period, without subtracting any costs or expenses?

If a charity has a fiscal year that coincides with the calendar, then the May 15 deadline for filing is used. Returns are typically due on the fifteenth day of the fifth month after the end of the organization’s fiscal year, but filing a Form 8868 before the due date gives an automatic three-month extension; an additional three-month extension may be requested on Form 8868 if the organization shows reasonable cause why the return cannot be filed by the extended due date.

Check out which form to file below – and remember reporting on executive compensation is different for each form!

2010 Tax Year and later

(Filed in 2011 and later)                           Form to File           Instructions

Gross receipts normally ? $50,000            990-N                      n/a

(May also choose to file a full return)

Gross receipts < $200,000, and                990-EZ                Instructions

Total assets < $500,000                             or 990

Gross receipts ? $200,000, or                     990                      Instructions

Total assets ? $500,000

Private foundation                                       990-PF                  Instructions

Some Must File Electronically

Almost all types of Forms 990 and Forms 8868 for the extension can be e-filed, but some organizations are required to e-file. These include the following organizations:

  • e-Postcard (Form 990-N) filers – Small tax-exempt organizations (those normally with annual gross receipts up to $50,000 for tax years ending on or after December 31, 2010).  Learn more and file at e-Postcard (Form 990-N).
  • Certain large tax-exempt organizations – Exempt organizations with $10 million or more in total assets if the organization files at least 250 returns in a calendar year, including income, excise, employment tax and information returns. Private foundations and non-exempt charitable trusts are required to file Forms 990-PF electronically regardless of their asset size if they file at least 250 returns annually.

All nonprofits can take advantage of the benefits of e-filing:

  • Identify errors before filing – Software shows location of errors in the return.
  • Faster acknowledgements – IRS sends acknowledgments within 24 hours.
  • Built-in accuracy checks – Typical paper Form 990 returns have an average error rate of more than 25 percent, whereas e-filing software catches most errors before the return is submitted.

Check out www.efile990.org for more information.

What Do Nonprofit Jobs Pay and Where Are They?

Posted on | by ERI

Sometimes a nonprofit job looks good.  Maybe you have made enough money to accept a lowersalary to work for a mission you are passionate about, or maybe any job looks good when you are not working. But what do nonprofit jobs pay and where exactly are they?

ERI’s compensation research shows that a CFO in a human services charity with $10 million in revenue in New York State would typically earn about $112,000 annually, while a similar CFO in a NYS for-profit company with $10 million in revenue averages nearly twice as much — almost $209,000 including the cash bonus! But health care sector salary differences tend to be minimized, as nonprofit hospitals must typically pay closer to for-profit rates to attract qualified candidates.  So the nonprofit versus for-profit salary differential varies with the type of nonprofit.  Get more salary information on nonprofit and for-profit salaries at www.erieri.com.

If you are not discouraged yet, the newly released national Nonprofit Employment Trends Survey (http://www.nonprofithr.com/clientuploads/2011EmploymentTrendsSurvey_WebReady.pdf) has some ideas about where to look for that nonprofit job. Analysis of the responses from over 450 nonprofits revealed the following trends:

  • Nearly 25% decreased the number of staff in 2010, but 60% said they intend to hire or are considering hiring this year.
  • Where new hires come from depends on the position level:
    • Entry-level:  50% from outside the nonprofit sector.
    • Experienced: 40% from within, 40% from other nonprofits, and 20% from outside the sector.
    • Senior/executive level: 25% from within, 50% from other nonprofits, and 20% from outside the sector.

The largest job growth will be at mid-sized and large organizations and in direct services, such as counseling, tutoring and mentoring programs (35%), along with program management/support (18%) and fundraising/development (15%).

To find candidates, nonprofits first use informal networking with colleagues and friends and formal networking with other nonprofits. Next, most used are online editions of local newspapers and Craigslist, followed by Idealist.org, CareerBuilder.com, and Monster.com.

So if you want that nonprofit job, try to maximize your networking opportunities:

  • Take a locally offered course in nonprofit management and finance.  Learn what you need to know and also meet others.
  • Sign up as a volunteer to help nonprofits with marketing, accounting and other areas and pick up some training, field experience, and networking opportunities.
  • Volunteer at a local charity whose mission you believe in. You never know where it will lead and whether you will meet a person there who could help in your job quest.

New IRS Rules Ahead for Unreasonable Nonprofit Compensation?

Posted on | by ERI

Nonprofits may face some new rules on setting executive compensation and self-dealing if Congress acts on recommendations from Senator Chuck Grassley (R-IA), ranking member of the Senate Finance Committee. Although this report focuses on media-based ministries, it also includes recommendations that would change which organizations are given nonprofit status by IRS, expand penalties on self-dealing, and establish new regulations on setting executive compensation for all nonprofits.

Current Requirements: 

Public charities now must report each year on how they set executive compensation. The IRS says that process should include:

  • Documenting the compensation policies and procedures in advance and including them in board minutes.
  • Collecting comparable salaries (for like services, in like enterprises, in like circumstances).
  • Setting compensation in advance on the basis of appropriate comparability data.
  • Making sure that no one involved in setting salaries has a conflict of interest.
  • Reporting all economic benefits to officers, directors, and key employees on Form 990.

The IRS now allows an organization to establish a rebuttable presumption of reasonableness (meaning the burden of proof that the compensation is unreasonable is on the IRS) if nonprofits use an independent survey of comparability data. Information and software that easily provide the necessary analyses can be obtained from ERI’s Nonprofit Salary Assessor, SalariesReview, Abbott, Langer Association Surveys, and other salary survey sources that specialize in the nonprofit sector.  But that may now change.

The Grassley Report Recommendations
The report recommends that Congress consider allowing IRS to give charity status only if an organization expressly prohibits excess benefit transactions to disqualified persons. Also, it calls for:

  • Imposing penalties if a manager had a “reason to know” an action was wrong, rather than the current standard of “knowingly participated in or approved” it.
  • Extending the penalties for excess benefit transactions to the organization if its board does not include sufficient independent members.
  • Replacing the rebuttable presumption standards with stronger guidelines and more reporting requirements on how compensation was determined.
  • Clarifying guidelines for how “comparable” pay is determined, including when for-profit comparisons are appropriate.

These are pretty radical changes and no one knows whether Congress will take them seriously or not. But in the meantime, all nonprofits should be clear that the public is concerned about nonprofit compensation and IRS compliance efforts are ongoing.

Nonprofit Compensation When Times are Tough

Posted on | by ERI

Setting compensation in nonprofits is tough these days – you need to attract and retain the needed staff, managers, and executives, but work within a tight budget that may even be shrinking. And prepare to explain (and perhaps defend) your salary decisions when questioned by funders, donors, media, members of the public, and perhaps clients and staff members.

Typically salaries represent well over 50% of an organization’s budget, so compensation mistakes are costly. Nonprofits stand to lose valuable staff or waste scarce resources and even forfeit their credibility within their communities. Some basic concepts to keep in mind about nonprofit compensation:

• What you need to pay is dependent on the labor market for the job. For example, a nonprofit hospital seeking a CEO has to compete for talent with for-profit and government hospitals, and the search could be statewide, or nationwide. A small nonprofit providing after school programs looking for an Executive Director would value other human services experience in the same area. Typically, the smaller the size, the more local the search.

• Size of the organization is important for executive jobs. Compensation for management tends to rise with revenues/assets, whether nonprofit or for-profit. The logic is that the bigger the size, the more dollars, revenue, clients, etc., are affected by management decisions.

• For non-management jobs, what counts is years of experience, not size of organization. if a company doubles in size, the director of accounting (management) may get a raise, but a bookkeeper probably won’t – an additional bookkeeper will be hired to do the extra work. So pay for the lower level job tends to be based on the experience the job requires or the experience of the incumbent.

• For non-management jobs, specific nonprofit experience is necessary. When looking for a receptionist, the desired qualities are friendliness, good organizational skills, etc.—similar experience in a company or government agency would also be relevant.

Whatever the compensation decisions, nonprofits must follow the practices required by IRS – collect the appropriate data and use them to make defensible decisions that reflect the organization’s compensation philosophy. Nonprofit resources need to be spent right – enough for compensation to attract, retain, and motivate the staff, while leaving sufficient dollars to achieve the organizational mission. And that becomes even more challenging in difficult economic times.