Recently, a piece of tax news may have caught your attention: the U.S. Department of the Treasury and the IRS released Notice 2026-36, providing guidance on a major expansion of the excise tax on "excess compensation" paid by nonprofit organizations' executives, and are seeking public comments (the deadline for submitting comments is August 4, 2026). The headline sounds a bit alarming, doesn't it? Feels like the IRS is stirring things up again? Don't worry — today we'll break it down in plain language, from the perspective of our Chinese tax clients in Austin, and talk about what this really means and whether it actually affects us.
What Is the "Excess Compensation Excise Tax"?
First, let's be clear about one thing: this tax targets "organizations," not "individuals." It's not a new tax aimed at ordinary employees or high-income individuals. Its full name is the "501(c) Organization Excess Compensation Excise Tax," and it specifically targets tax-exempt entities that enjoy tax-exempt status, such as large hospitals, universities, and charitable foundations.
Under the original rules established by the 2017 Tax Cuts and Jobs Act, if a tax-exempt organization under Section 501(c) pays any of its five highest-paid "covered employees" more than $1 million in compensation, the organization must pay a hefty excise tax of 21% on the amount exceeding $1 million. The real news this time is that, under the One Big Beautiful Bill Act (OBBBA), for tax years beginning after December 31, 2025, the scope of this tax has been significantly expanded — it is no longer limited to the five highest-paid employees, but now covers any employee of the organization whose annual compensation exceeds $1 million. Yes, you read that right — the organization itself pays the tax, and the purpose is to discourage tax-exempt organizations from paying excessively high salaries to their executives.
For example: suppose a large nonprofit hospital in Austin pays its CEO an annual salary of $1.5 million. The $500,000 that exceeds the $1 million threshold would require the hospital to pay the IRS an excise tax of $105,000 ($500,000 x 21%). Like other operating costs the organization must cover, this amount directly reduces the funds available for its core mission.
How Does This Relate to My Life as a Chinese Resident in Austin?
"I'm not an executive at a nonprofit organization, so how does this affect me?" This is many people's first reaction. It's true that for most people, the impact is indirect — but it's still worth understanding, because it may touch on some aspect of your life.
1. If you are a charitable donor: Many members of the Chinese community are passionate about giving back and regularly donate to churches, community organizations, alumni foundations, and similar groups. This new rule effectively protects your donations. It helps ensure that these organizations' funds are used more for their stated charitable purposes, rather than flowing to a handful of executives in the form of excessive salaries. In the long run, this contributes to the overall health of the charitable ecosystem and makes your generosity more meaningful.
2. If you work at or serve as an executive of a nonprofit organization: This news is directly relevant to you. It's especially worth noting that after the expansion, it's no longer just the five highest-paid executives who need to be counted, but any employee earning more than $1 million — meaning more organizations and more positions will be covered. Although the organization bears the tax, boards and executive leadership must factor this potential 21% tax cost into how they design compensation packages. This could affect future compensation structures and negotiations. As an executive, understanding this rule can help you better understand your employer's financial decisions. And if you happen to serve as a director or finance officer at such an organization, compliance becomes a hard requirement that calls for professional tax planning.
3. If you care about social equity and the direction of tax policy: This news sends an important signal: the IRS is stepping up oversight of entities with special tax status. Much like what we've discussed before regarding individual foreign account reporting (as covered in our FBAR Filing Guide), this reflects the IRS's ongoing effort to close tax loopholes and ensure fairness within the tax system. Understanding these broader trends can help us better plan our personal finances.
In short, this rule is primarily about "regulating organizations," not "increasing individual tax burdens." It reminds us that any organization enjoying tax-exempt benefits also carries corresponding social responsibilities and compliance obligations — a principle that parallels our own personal tax filing. For more in-depth tax insights, feel free to check out our Tax Insights column.
YZ CPA Note
Although this excise tax does not directly target individuals, it's a reminder that the U.S. tax system is complex and constantly evolving. For executives and directors working in any specialized industry (such as nonprofit organizations), understanding industry-specific tax risks is essential. If you are a decision-maker at such an organization, you should promptly review Notice 2026-36's guidance and reassess your existing compensation policies for compliance; if you have comments, you may also submit them to the Treasury and the IRS before August 4, 2026. For ordinary taxpayers, staying informed about changes in U.S. tax policy remains a wise practice. As we emphasize every year in our Chinese Tax Filing Guide, advance planning and professional consultation are the most effective ways to navigate a complex tax environment. When dealing with tricky tax issues, consulting an experienced Austin Chinese CPA firm like ours can help ensure that you and your organization stay on the right track.
For professional tax assistance, please visit our YZ CPA Services page or contact us.