Treasury and IRS prepare regulations for $1 million compensation tax at nonprofits

Treasury and the Internal Revenue Service announced June 6 that they intend to propose regulations implementing a new excise tax on excessive compensation and parachute payments at tax-exempt organizations.

The agencies’ Notice 2026-36 describes a framework that may apply when an employee’s compensation exceeds $1 million in a tax year or when an excess parachute payment is made. The notice is not a final rule, and the final proposed regulations had not been issued in the source record.

The pending guidance could affect compensation planning and compliance work at large charities, foundations, hospitals, universities and religious organizations nationwide. It does not mean that every nonprofit employee earning more than $1 million will automatically trigger the tax. The eventual scope will depend on statutory exceptions, organizational definitions and the regulations still to come.

What the notice covers

Notice 2026-36 addresses employees of applicable tax-exempt organizations and the definitions of covered employees. It also addresses two potential triggers: compensation above $1 million in a tax year and excess parachute payments.

The notice preserves limited-hours and nonexempt-funds exceptions until further guidance is issued. Those exceptions are part of why the agencies’ announcement should be read as preparation for rulemaking rather than as a completed assessment against a particular organization.

The source record does not identify a nonprofit, religious organization or other tax-exempt entity that has already been assessed the tax. It also does not establish which specific employees or organizations will ultimately be covered.

Timing and tax-year impact

Treasury and the IRS requested comments by August 4, 2026. The agencies said the forthcoming proposed regulations are not expected to apply to tax years beginning before final regulations are issued.

That prospective approach gives organizations a reason to monitor the rulemaking before changing compensation arrangements or calculating a liability under the forthcoming framework. It also leaves important compliance questions unresolved until the proposed and final regulations are available.

The notice includes a lookback involving covered employees for tax years beginning after December 31, 2016, through December 31, 2025. That history is relevant to the agencies’ covered-employee definitions, but it does not by itself establish that a tax is owed by every person who met a compensation threshold during those years.

Why nonprofit leaders are watching

Tax-exempt organizations use a range of compensation structures, and the proposed framework could affect how organizations review executive pay, employment agreements and departure payments. The notice’s treatment of parachute payments makes separation arrangements a separate compliance issue from an employee’s regular annual compensation.

Churches and religious organizations are among the entities that may qualify for federal tax exemption, according to IRS guidance. That means the rulemaking is relevant beyond conventional charities and foundations, although the final regulations will determine which organizations and employees fall within the applicable definitions.

The IRS’s Exempt Organizations Update, published July 17, also listed an August 19, 2026, Nationwide Tax Forum session for nonprofit representatives and directed nonprofit leaders and volunteers to federal compliance resources. The source record does not say that the session will resolve the compensation-tax questions raised by Notice 2026-36.

For now, the next formal step is the regulatory process: the agencies must issue the proposed regulations, consider comments and eventually issue final regulations before the new framework’s prospective application can be determined. Until then, organizations have an announced policy direction, but not a final rule establishing the exact liability for any particular nonprofit or employee.