3528 / Are there any exceptions to the application of the 21 percent excise tax on certain individuals who provide services for tax-exempt organizations?

In order to be covered by the new regulations, the individual receiving remuneration from the ATEO must be an employee, not an independent contractor. The typical facts-and-circumstances analysis is used to determine whether independent contractor status is appropriate.

The proposed regulations also contain exceptions designed to exempt certain individuals who provide minimal services for the ATEO. This new rule is meant to exclude “employees” who donate services to tax-exempt organizations.

Under the exceptions, (1) a director is not an employee in the capacity as a director and (2) an officer performing minor or no services and not receiving any remuneration for those services is not an employee. Employees of a related non-ATEO are not considered for purposes of determining the five highest-compensated employees if they are never employees of the ATEO. In addition, individuals who receive no remuneration (or a legally binding right to remuneration) from the ATEO or a related organization cannot be among the ATEO’s five highest-compensated employees.¹

Under the limited hours exception, an ATEO’s five highest-compensated employees also exclude an employee of the ATEO who receives no remuneration from the ATEO and performs only limited services for the ATEO, which means that no more than 10 percent of total annual hours worked for the ATEO and related organizations are for services performed for the ATEO.² An employee who performs fewer than 100 hours of services as an employee of an ATEO and its related ATEOs is treated as having worked less than 10 percent of total hours for the ATEO and related ATEOs.³

Under the non-exempt funds exception, an employee who is not compensated by an ATEO, related ATEO, or any taxable related organization controlled by the ATEO and who primarily (more than 50 percent of total hours worked) provides services to a related non-ATEO is also disregarded.

Similarly, an employee is disregarded if an ATEO paid less than 10 percent of the employee’s total remuneration for services performed for the ATEO and all related organizations. However, in the case of related ATEOs, if neither the ATEO nor any related ATEO paid more than 10 percent of the employee’s total remuneration, then the ATEO that paid the highest percent of remuneration does not meet this exception. Basically, this exception only applies in the case of multiple ATEOs paying compensation to the same employee.

An employee is disregarded for purposes of determining an ATEO’s five highest-compensated employees for a taxable year even though the ATEO paid remuneration to the employee if, for the applicable year, all of the following requirements are met:

(1)   Remuneration requirement. The ATEO did not pay 10 percent or more of the employee’s total remuneration for services performed as an employee of the ATEO and all related organizations; and

(2)   Related organization requirement. The ATEO had at least one related ATEO and one of the following conditions apply:

a. Ten percent remuneration condition. A related ATEO paid at least 10 percent of the remuneration paid by the ATEO and all related organizations; or

b. Less remuneration condition. No related ATEO paid at least 10 percent of the total remuneration paid by the ATEO and all related organizations and the ATEO paid less remuneration to the employee than at least one related ATEO.⁴