IRS Widens the Nonprofit Pay Excise Tax to Any Employee Over $1 Million

Treasury and the IRS said on June 5, 2026, that they intend to write new rules under Section 4960 broadening the excise tax on excess pay at tax-exempt organizations, following a change enacted in the One Big Beautiful Bill Act. Notice 2026-36 confirms the tax can now apply to any employee earning more than $1 million in a year, not just an organization's five highest-paid employees as under prior law.

What changed

Section 4960 imposes a 21% excise tax, paid by the tax-exempt organization, on compensation above $1 million paid to a "covered employee," plus on certain large severance payments known as excess parachute payments. Before this year, only an organization's five highest-compensated employees for the year, and anyone who had ever held that status, counted as covered employees. The new law removes that headcount limit: any current or former employee paid more than $1 million can now trigger the tax, regardless of rank inside the organization, for tax years beginning after December 31, 2025. The notice also preserves some existing exceptions for medical and veterinary professionals while Treasury finishes the formal regulations, and it opens a comment period running to August 4, 2026, according to a summary from Ropes & Gray.

Who is affected

The excise tax is paid by the organization, not the individual, but the change reaches into the affairs of wealthy families in a specific way: it applies to universities, hospital systems, museums and private foundations where a family member may serve as a board member, officer or highly paid employee, and where family foundations sometimes pay staff, including relatives, well above $1 million. A foundation that pays a family member serving as executive director more than $1 million a year could now owe the excise tax on the excess even if that person is not among the foundation's five best-paid employees, simply because more than one employee can now be "covered."

The after-tax math

Example: a private foundation pays its executive director $1.6 million in total compensation for 2026, a figure that includes salary, deferred compensation vesting that year, and the value of certain benefits. The excise tax applies to the $600,000 above the $1 million threshold. At 21%, the foundation owes $126,000 in excise tax on that one employee's pay - money that comes out of the foundation's assets, reducing what is otherwise available for grantmaking, and unrelated to whether the executive director's own income tax liability changed.

Moves to discuss with your advisor

• Review foundation and nonprofit payrolls. Families who run or sit on the board of a private foundation, family office charitable arm, or other tax-exempt entity may want a compensation review before the end of the first affected tax year.
• Reconsider deferred compensation timing. Because deferred amounts can count toward the threshold when they vest, the year a payment is structured to land matters more than it did under the narrower prior rule.
• Submit comments if affected. The August 4 comment deadline is an opportunity for organizations to flag transition issues before the rules are finalized.

What to watch

Notice 2026-36 is a statement of intent, not the final regulations, so organizations are operating on interim guidance until Treasury publishes proposed rules. Nonprofits and family foundations with highly paid staff should expect additional detail after the comment period closes, particularly on how deferred compensation vesting and multi-year severance arrangements will be measured against the $1 million threshold.

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