26 U.S.C. § 4960 (INTERNAL REVENUE CODE)
§ 4960. Tax on excess tax-exempt organization executive compensation
(a) Tax imposed
There is hereby imposed a tax equal to the product of the rate of tax under section 11 and the sum of—
(1) so much of the remuneration paid (other than any excess parachute payment) by an applicable tax-exempt organization for the taxable year with respect to employment of any covered employee in excess of $1,000,000, plus
(2) any excess parachute payment paid by such an organization to any covered employee.
For purposes of the preceding sentence, remuneration shall be treated as paid when there is no substantial risk of forfeiture (within the meaning of section 457(f)(3)(B)) of the rights to such remuneration.
(b) Liability for tax
The employer shall be liable for the tax imposed under subsection (a).
(c) Definitions and special rules
For purposes of this section—
(1) Applicable tax-exempt organization
The term “applicable tax-exempt organization” means any organization which for the taxable year—
(A) is exempt from taxation under section 501(a),
(B) is a farmers’ cooperative organization described in section 521(b)(1),
(C) has income excluded from taxation under section 115(1), or
(D) is a political organization described in section 527(e)(1).
(2) Covered employee
For purposes of this section, the term “covered employee” means any employee of an applicable tax-exempt organization (or any predecessor of such an organization) and any former employee of such an organization (or predecessor) who was such an employee during any taxable year beginning after December 31, 2016.
(3) Remuneration
For purposes of this section:
(A) In general
The term “remuneration” means wages (as defined in section 3401(a)), except that such term shall not include any designated Roth contribution (as defined in section 402A(c)) and shall include amounts required to be included in gross income under section 457(f).
(B) Exception for remuneration for medical services
The term “remuneration” shall not include the portion of any remuneration paid to a licensed medical professional (including a veterinarian) which is for the performance of medical or veterinary services by such professional.
(4) Remuneration from related organizations
(A) In general
Remuneration of a covered employee by an applicable tax-exempt organization shall include any remuneration paid with respect to employment of such employee by any related person or governmental entity.
(B) Related organizations
A person or governmental entity shall be treated as related to an applicable tax-exempt organization if such person or governmental entity—
(i) controls, or is controlled by, the organization,
(ii) is controlled by one or more persons which control the organization,
(iii) is a supported organization (as defined in section 509(f)(3)) during the taxable year with respect to the organization,
(iv) is a supporting organization described in section 509(a)(3) during the taxable year with respect to the organization, or
(v) in the case of an organization which is a voluntary employees’ beneficiary association described in section 501(c)(9), establishes, maintains, or makes contributions to such voluntary employees’ beneficiary association.
(C) Liability for tax
In any case in which remuneration from more than one employer is taken into account under this paragraph in determining the tax imposed by subsection (a), each such employer shall be liable for such tax in an amount which bears the same ratio to the total tax determined under subsection (a) with respect to such remuneration as—
(i) the amount of remuneration paid by such employer with respect to such employee, bears to
(ii) the amount of remuneration paid by all such employers to such employee.
(5) Excess parachute payment
For purposes of determining the tax imposed by subsection (a)(2)—
(A) In general
The term “excess parachute payment” means an amount equal to the excess of any parachute payment over the portion of the base amount allocated to such payment.
(B) Parachute payment
The term “parachute payment” means any payment in the nature of compensation to (or for the benefit of) a covered employee if—
(i) such payment is contingent on such employee’s separation from employment with the employer, and
(ii) the aggregate present value of the payments in the nature of compensation to (or for the benefit of) such individual which are contingent on such separation equals or exceeds an amount equal to 3 times the base amount.
(C) Exception
Such term does not include any payment—
(i) described in section 280G(b)(6) (relating to exemption for payments under qualified plans),
(ii) made under or to an annuity contract described in section 403(b) or a plan described in section 457(b),
(iii) to a licensed medical professional (including a veterinarian) to the extent that such payment is for the performance of medical or veterinary services by such professional, or
(iv) to an individual who is not a highly compensated employee as defined in section 414(q).
(D) Base amount
Rules similar to the rules of 280G(b)(3) shall apply for purposes of determining the base amount.
(E) Property transfers; present value
Rules similar to the rules of paragraphs (3) and (4) of section 280G(d) shall apply.
(6) Coordination with deduction limitation
Remuneration the deduction for which is not allowed by reason of section 162(m) shall not be taken into account for purposes of this section.
(d) Regulations
The Secretary shall prescribe such regulations as may be necessary to prevent avoidance of the tax under this section, including regulations to prevent avoidance of such tax through the performance of services other than as an employee or by providing compensation through a pass-through or other entity to avoid such tax.
(Added Pub. L. 115–97, title I, § 13602(a), Dec. 22, 2017, 131 Stat. 2157; amended Pub. L. 119–21, title VII, § 70416(a), July 4, 2025, 139 Stat. 223.)
heading: Editorial Notes
heading: Amendments
text: 2025—Subsec. (c)(2). Pub. L. 119–21 amended par. (2) generally. Prior to amendment, text read as follows: “For purposes of this section, the term ‘covered employee’ means any employee (including any former employee) of an applicable tax-exempt organization if the employee—
“(A) is one of the 5 highest compensated employees of the organization for the taxable year, or
“(B) was a covered employee of the organization (or any predecessor) for any preceding taxable year beginning after December 31, 2016.”
heading: Statutory Notes and Related Subsidiaries
heading: Effective Date of 2025 Amendment
text: Pub. L. 119–21, title VII, § 70416(b), July 4, 2025, 139 Stat. 223, provided that: “The amendment made by subsection (a) [amending this section] shall apply to taxable years beginning after December 31, 2025.”
heading: Effective Date
text: Pub. L. 115–97, title I, § 13602(c), Dec. 22, 2017, 131 Stat. 2159, provided that: “The amendments made by this section [enacting this section] shall apply to taxable years beginning after December 31, 2017.”