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Updated 1/16/2019

Notice 2019-09, published by the IRS on Dec. 31, 2018, addresses the new 21 percent excise tax on employee remuneration above $1 million paid by tax-exempt employers. The tax, enacted as part of the Tax Cuts and Jobs Act (TCJA) and effective for tax years beginning after 2017, affects the five most highly paid employees at tax-exempt organizations. 

The 92-page notice offers many details to help employers implement the new provision, including the definition of key terms and their applications, illustrated by examples.

It also explains how to compute, report, and pay the excise tax. Until proposed regulations are published, organizations may use a “good faith, reasonable interpretation of the statute” to comply, according to the notice.

What employers are covered? 

The notice defines applicable tax-exempt organizations (ATEOs) that must pay the tax as:

  • Organizations exempt from taxation under Internal Revenue Code (IRC) section 501(a);
  • Farmers’ cooperative organizations under section 521(b)(1);
  • Organizations that have income excluded from taxation under section 115(1); and
  • Political organizations described in section 527(e)(1).

The guidance expressly states that the provision is not applicable to state colleges or universities unless they either claim exemption from tax under section 501(a) or exclude income under section 115(1). The notice also states a governmental entity may voluntarily relinquish its section 501(c)(3) status and thereby avoid being subject to the excise tax—only if it does not exclude income under section 115(1). 

The recently published "Blue Book"—the Joint Committee on Taxation’s explanation of the TCJA—clarifies that in enacting tax reform, congressional intent was for the tax on executive compensation to be applied to all public colleges and universities. 

Which employees are covered?

The notice explains that a covered employee is any employee who is one of the organization’s five highest-compensated employees for the current taxable year or who was a covered employee for any preceding taxable year beginning after December 31, 2016. Covered employees are determined on a per-employer basis rather than a per-group basis. The notice specifies that in order to be in good-faith compliance with the provision, each ATEO within a related group must maintain its own list of covered employees.


The TCJA defines remuneration as wages paid during the taxable year, excluding any Roth contributions but including amounts required to include in the employee’s wages under the section 457(f) deferred compensation rules. The notice clarifies that remuneration includes any parachute payments that are not excess parachute payments. Generally, contributions to and payments from qualified retirement plans and tax-sheltered annuities are excluded from remuneration. 

Exception for Medical Services Performed

Excluded from the definition of remuneration is compensation paid for medical or veterinary services by a licensed medical professional. The notice states that medical services are those directly related to the performance of medical and nursing services as defined in IRC section 213(d), which covers duties performed “for the diagnosis, cure, mitigation, treatment, or prevention of disease, or which affect the structure or function of the body.” According to the notice, administrative, teaching, or research services generally are not considered medical services.  However, to the extent a licensed medical professional provides direct medical care to a patient in the course of administrative, teaching, or research services, the remuneration allocable to those services is excluded for the purposes of defining remuneration. Employers must use a reasonable, good-faith method to apportion the remuneration between medical and non-medical services, including referring to the employment agreement, insurance and billing records, or organizational time reporting.

Related Organizations

For purposes of the new excise tax on compensation of the five most highly compensated employees, remuneration is defined as the aggregate of remuneration paid by the ATEO and any of its related organizations, including related for-profit organizations and related governmental units and entities.

Reporting Period

The TCJA states that remuneration paid to an employee is calculated according to the taxable year.  Notice 2019-09 clarifies that for purposes of the excise tax, this means remuneration paid in the calendar year ending with or within the ATEO’s taxable year–similar to compensation information reported on Schedule J of the Form 990. For example, here’s how the tax would apply to an institution with a fiscal year ending on June 30:

  • Amounts paid between January 1 and June 30, 2018, are exempt from the excise tax.
  • Amounts paid between July 1 and December 21, 2018, are included in the excise tax calculation for the organization’s 2018 taxable year ending on June 30, 2019.
  • Amounts paid during calendar year 2019 are included in the excise tax calculation from the organization’s 2019 taxable year, which ends on June 30, 2020, and so forth.
  • Amounts paid–or remuneration–includes section 457(f) deferred compensation benefits that during that year.

When and How to File

The excise tax must be paid by the 15th day of the fifth month following the end of the organization’s taxable year. In this example, the first taxable year the tax could apply would be the one ending June 30, 2019, which means the due date for paying the tax would be November 15, 2019.The tax needs to be reported on IRS Form 4720, which is due on the same date (and is also the deadline for the Form 990). Organizations can file Form 8868 to obtain an automatic six-month extension for filing for Form 4720, but this does not extend the deadline for paying the excise tax.

Comments from the regulated community are requested on certain provisions related to the calculation of remuneration. They are due to the IRS by April 2.


Mary Bachinger

Director, Tax Policy


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