The One Big Beautiful Bill Act (OBBBA) has significantly expanded the 21% excise tax on “excess compensation” paid by certain tax-exempt organizations.
Under prior law, this tax applied only to the five highest-compensated employees earning over $1 million in a tax year. Now, the excise tax applies to any employee or contractor who earns over $1 million, regardless of their ranking or role.
This expansion means that many nonprofits will need to reassess their compensation structures, particularly for executives, key employees, and other high earners.
What This Means for Nonprofits
- Broader Exposure:
Nonprofits that previously fell outside the scope of the excise tax may now find themselves subject to it. Any employee crossing the $1 million threshold could trigger a 21% excise tax liability. - Policy and Governance Updates:
Organizations should revisit board-approved compensation structures, bonus and severance agreements, deferred compensation arrangements, and parachute payments to identify potential risks. - Strengthened Documentation:
Compensation policies and governance processes must clearly document how pay is determined and demonstrate reasonableness to withstand IRS scrutiny. - Forward-Looking Planning:
Even if no employee currently earns $1 million, salary growth and inflation may change that in the near future. Proactive modeling can help organizations plan for potential exposure before it happens.
Recommended Next Steps for Nonprofit Leaders
- Run a compensation review: Identify top earners, contractors, and any deferred compensation that may push someone above the $1M threshold.
- Update internal policies: Ensure executive compensation, bonuses, and severance structures are fully reviewed and board-approved.
- Engage the board early: Provide education on the new rules to strengthen oversight and alignment.
- Model future exposure: Build scenarios to anticipate how future compensation changes might trigger the excise tax.
How TrimnerBeckham Can Help
At TrimnerBeckham, we specialize in helping nonprofit organizations navigate complex tax laws and regulatory changes. Our team can help your organization:
- Assess whether your compensation structures create excise tax exposure
- Model potential risks for future years
- Strengthen governance, documentation, and policy alignment
- Stay compliant and protect your mission
📩 Contact us to schedule a consultation and ensure your organization is ready for this expanded excise tax landscape.
