One of the most common areas that I speak on across the country is regarding the area of compensation. As a general rule, it seems that nonprofit organizations struggle with the intricacies of the rules regarding the payment of compensation and even the definition of what is compensation. Therefore, I have decided to start a multiple part blog series on this subject as a means of offering some much needed guidance. I plan to post once a week. I don't know how many weeks it will take, so join in for the next few weeks to brush up on your knowledge in this area and maybe learn a few new things along the way.
Compensation & the Overriding Philosophy of Tax Law
Perhaps the first stumbling block or hurdle to overcome in this area is to finally acknowledge how vast an array of information this topic covers. I generally find that the normal person does not realize one of the foundational truths of the U.S. tax code. This truth is based on two premises:
- Everything that benefits an employee is a form of compensation and
- Everything is taxable until the Internal Revenue Code says its not.
In general, it seems that the natural human response or thought process goes something like this:
- Compensation is what is reported on my paycheck stub and
- Nothing is taxable until somebody proves to me it is (or with my clients, until Elaine tells me it is.)
Needless to say, it is necessary for an organization to first come to a realization that compensation has a more far reaching definition than may have previously been considered and that taxation should be the assumed consequence of any benefit until otherwise proven. This is critical because there are very specific rules that apply to nonprofits, including religious organizations and churches. A deviation from these rules can be costly to the organization and the employee.
With this as the basis for the series, we will start to work through a 10 Step process for defining and dealing with compensation within a nonprofit organization. Next week - Step #1 - Who Gets to Decide on Compensation.