Section 4960 Nonprofit Executive Compensation Excise Tax Calculator 2026
Calculate the 21% Section 4960 excise tax on nonprofit executive compensation over $1 million and excess parachute payments. Top-5 covered employee analysis.
Top-5 Covered Employee Compensation
Enter annual compensation for each covered employee. The 21% excise tax applies to the amount exceeding $1,000,000 per employee.
$
Separation payments above the 3x base amount safe harbor $
Average annual compensation for the 5 most recent years $0
Total Section 4960 Excise Tax
$0
Total Excess Compensation (over $1M)
$0
Excise on Parachute Payments
$0
3x Safe Harbor Limit
Compensation Breakdown by Employee
| Employee | Total Comp | Excess over $1M | Excise Tax (21%) |
|---|
How Section 4960 Works
Section 4960 imposes a 21% excise tax on two types of payments: (1) compensation exceeding $1 million paid to covered employees, and (2) excess parachute payments. The tax is paid by the organization, not the employee. Multiple related organizations must aggregate compensation when applying the $1 million threshold.
The Formulas
Excess Compensation = max(Total Comp β $1,000,000, 0) per covered employee
Compensation Excise = Excess Compensation Γ 21%
3x Safe Harbor = Base Amount Γ 3
Excess Parachute = Total Separation Pay β Base Amount (if total exceeds 3x base)
Parachute Excise = Excess Parachute Γ 21%
Total Section 4960 Excise = Compensation Excise + Parachute Excise
Compensation Excise = Excess Compensation Γ 21%
3x Safe Harbor = Base Amount Γ 3
Excess Parachute = Total Separation Pay β Base Amount (if total exceeds 3x base)
Parachute Excise = Excess Parachute Γ 21%
Total Section 4960 Excise = Compensation Excise + Parachute Excise
Sources and References (click to expand)
- IRC Section 4960 β Tax on Excess Tax-Exempt Organization Executive Compensation
- Treasury Regulation 53.4960-1 β Definitions and Rules for Section 4960
- IRS Notice 2019-09 β Interim Guidance on Section 4960 Excise Tax
- IRS Form 4720 β Return of Certain Excise Taxes Under Chapters 41 and 42
- Tax Cuts and Jobs Act of 2017 (TCJA) β Public Law 115-97, Section 13602
Extended
Parachute Payment Optimizer & Multi-Employee Excise Analysis
Optimize separation pay structure to stay below 3x safe harbor; SVG bar chart of excise by employee
Optimize separation pay structure to stay below the 3x base amount safe harbor. Adjust the base amount and total payout to see excise tax impact.
$
5-year average annual compensation $
Section 4960 Excise Tax by Employee
Parachute Safe Harbor Analysis
| Metric | Value | Status |
|---|
Multi-Year Covered Employee Tracking
| Employee | 2026 Comp | Excess | Excise (21%) | Covered Next Year? |
|---|
Frequently Asked Questions
What is the Section 4960 excise tax on nonprofit executive compensation?
Section 4960, enacted by the Tax Cuts and Jobs Act of 2017, imposes a 21% excise tax on applicable tax-exempt organizations when they pay covered employees compensation exceeding $1 million, or when they pay excess parachute payments. The tax mirrors the corporate tax rate and is intended to discourage excessive pay at nonprofits similar to the Section 162(m) limit on public companies.
Who are "covered employees" under Section 4960?
Covered employees are the five highest-compensated employees of the organization for the taxable year and any employee who was a covered employee in any prior year after December 31, 2016. Once an employee becomes a covered employee, they remain covered employees indefinitely β even after leaving the organization. This "once covered, always covered" rule can create ongoing excise tax exposure.
What organizations are subject to Section 4960?
Applicable tax-exempt organizations include: 501(c)(3) organizations, 501(c)(4) social welfare organizations, state and local government entities, and certain other tax-exempt entities. The tax applies to the organization itself, not the employee. Related organizations that share employees must aggregate compensation for the $1 million threshold.
How are excess parachute payments calculated under Section 4960?
Excess parachute payments occur when a covered employee receives separation pay exceeding 3 times their "base amount" (the average annual compensation for the 5 most recent taxable years). The excess parachute payment equals total separation payments minus 1x the base amount. The 21% excise tax applies to this excess. Payments below 3x the base amount are safe from the excise tax.
Can a nonprofit avoid the Section 4960 excise tax?
Organizations can minimize exposure by: (1) keeping covered employee total compensation under $1 million; (2) structuring separation agreements to stay below the 3x base amount safe harbor; (3) allocating compensation across multiple related organizations to reduce each entity's share; and (4) taking advantage of exclusions for medical professionals providing direct services.