Tax Information Reporting for Non-Profit Organizations

Information reporting, such as on Forms 1099 or W-2, is one of the crucial components of a well-functioning tax system.  Such information reporting both assists taxpayers in filing of their annual returns as well as informs the government of income earned by taxpayers.  Broadly speaking, the IRS has placed the burden of information reporting on the payors but ultimately the requirement to report income falls on the recipient. 

Much like with wage reporting, the Internal Revenue Code does not make the distinction between Non-Profit Organizations and For-Profit Organizations, thereby requiring many Non-Profit Organizations to file annual information returns.  The most common form of information reporting for organizations (besides payroll) is the filing of Form 1099. 

The most common types of reportable payments made by organizations which require reporting are

  • Non-Employee Compensation
    • These are payments to independent contractors made by the organization.  These can include service providers like accountants and lawyers.  Organizations should be sure that payees are independent contractors and not employees
  • Rent
    • Payments for the use of property (typically including any CAM charges or Real Estate Taxes included as part of the lease) are subject to information reporting.
  • Other Income
    • Organizations that make other payments that may be taxable to the recipient (such as prizes, awards, or non-qualified scholarships) should report these as “Other Income”

One area that is unique to the Non-Profit Sector is the potential payment in relation to the mission of the organization.  The Internal Revenue Code does have a somewhat broad definition of income, with income as “all income from whatever source derived” meaning “instances of undeniable accessions to wealth, clearly realized and over which taxpayers have complete dominion.”  While some of these cases can be clear (wages, interest) others can be a bit more obtuse (certain fringe benefits, prizes, and awards).  Where does a payment or benefit from an organization fit in – certainly if an organization is helping someone in need, the last thing they may want is to create a taxable burden on someone as a result. 

Luckily, there is an exemption for these payments.  The IRS considers payments from organizations generally to be “gifts” under IRC Section 102.  The IRS has published several different revenue rulings (Rev. Rul. 2003-12, 99-44, INFO 2006-0027) which elaborate on this, but largely the payments are made because of “detached and disinterested generosity….out of affection, respect, admiration, charity of like impulses.”  As such, the payments are “excluded from gross income” and “not subject to information reporting under 6041.”  So long as the recipients are not required to perform any services or similar and the payments are made out of this generosity the payments should be both exempt from tax and information reporting. 

Finally, a common question for many non-profit organizations relates to payments for foreign contractors.  Most non-profits are familiar with the information reporting rules requiring Form 1099 to contractors, but when the payment is made to an overseas contractor (who typically will not have a Social Security Number) questions arise.  While no one answer can be said, generally, payments made to a service provider who is providing the services outside of the US are not subject to US Taxation (as they are not Effectively Connected Income) and are not subject to reporting requirements.  Organizations should obtain a Form W-8 BEN from these contractors, which is a certification that the payments are not Effectively Connected Income (e.g. performed in the US). 

Other payments that are not for services (e.g. awards or prizes) or are performed by a non-resident individual in the US or are Effectively Connected Income are both taxable in the US and reportable payments.  Such payments are reported on Form 1042-S and may be subject to withholding at the source, which can vary greatly depending on the nature of the payment and the citizenship of the recipient. 

Edward McWilliams, CPA



Ed is a Partner in the firm’s tax and business advisory practice focusing on providing services to middle market private companies across different industries as well as to early stage startups. Ed has over a decade of experience providing tax and business consulting services to these companies of different sizes and across different industries, bringing a broad and diverse knowledge base and strategic solutions to the many complex issues that businesses face.

Audit Committee Bootcamp: Internal Communication and Understanding Risk

Roles and Responsibilities

Internal Communication and Understanding Risk

Wednesday, May 5, 2021

Matthew Burke & Tania Quigley

The role of the audit committee with respect to internal parties – We will discuss who should be communicating with the audit committee, how often, what information should the audit committee review with respect to the organization’s control environment, what risks should the organization be considering and whose responsibility it is.

Audit Committee Bootcamp: The Committee’s Role in the Audit Process

Roles and Responsibilities

Tuesday, April 13, 2021

Ken Cerini & Matthew Burke

The role of the audit committee with respect to external parties – We will discuss the audit RFP, the selection of the external auditors, what you should be asking of your auditors, going beyond the financials to focus on analytics, operations, and compliance, and more. (e.g. government audits).

Audit Committee Bootcamp: Roles and Responsibilities

Roles and Responsibilities

Roles and Responsibilities

Tuesday, March 30, 2021

Ken Cerini & Tania Quigley

The role of the audit committee – we will discuss the audit committee, what its purpose is, who should be on the audit committee, what the audit committee should be focusing on, what should be discussed at each meeting, etc. This is more of an overview that feeds into the second and third meetings.

Audit Committee Bootcamp Wrap Up


In the fall of 2020, we presented a three-part webinar series, Audit Committee Bootcamp. We created this webinar series to bring important information about the audit committee and its roles and responsibilities to light. The information we shared was broken out in the following topics: roles and responsibilities of the audit committee; the committee’s role in the audit process; and internal communication and understanding risk. Here is a summary of the information presented at each webinar.


  • The audit committee is a committee of the Board. Its members, all independent of the organization, typically include those that understand financial statements that are prepared in accordance with accepted accounting principles, the financial statement audit process, and the organization’s internal controls.
  • An important purpose of the audit committee is to evaluate the internal and external risks of the organization.
  • The audit committee should meet with the board of directors, external auditors, and if the organization has these functions/requirements: internal auditors and corporate/Medicaid compliance officer/quality assurance officer.
  • The audit committee reviews and approves the organization’s audited financial statements, auditor’s findings, reports from government audits and its funding sources, and its annual IRS Form 990 and applicable state returns. If the organization has a pension plan, the audit committee should also review the pension to make sure it is properly being benchmarked on a periodic basis.
  • The audit committee will meet periodically throughout the year and minutes must be maintained for all meetings held.


  • Audit Committee members play an important role in the selection of the organization’s external auditor.
  • The audit committee will prepare a request for proposal to send out to various CPA Firms, including the organization’s existing external audit firm.
  • There are many factors to consider when selecting an audit firm. Does the firm have experience working with other organizations in the same industry? The firm should provide references to organizations that are comparable to your organization. COVID-19 brought a change in how audits are performed. Is the firm’s use of technology appropriate for remote working and secure for sharing of sensitive audit documents? Other than performing the audit, is the auditor available to answer questions throughout the year? Do they provide resources for accounting and industry updates? Other factors to consider are staffing patterns, will the partner and manager have significant involvement in the audit; demeanor and communication style, responsiveness to emails, deadline awareness, flexibility of the auditor to work with you with respect to audit adjustments and findings; fees and extra billing, how does the firm budget for annual increases and will they bill for additional time spent above the quoted audit fee. Price is an important factor for many organizations; however, audit quality should be in line with the price of the audit. Lastly, the audit firm’s most recent peer review report should be reviewed.
  • Based on the previously noted factors, the audit committee should develop a scorecard to compare the type of factors that are most important in the decision of the audit firm.
  • Once the audit firm is selected, the audit committee will review the engagement letter to ensure understanding of management and the auditor’s responsibilities.
  • The audit committee will meet with the auditors before and after the audit, approve the audited financial statements and audit findings, if any, and present to the full board of directors.


  • The audit committee interacts with the Board of directors, management of the organization, internal and external auditors.
  • There is a purpose for the audit committee’s communication with each of these groups. The discussions with the board of directors are for the plans and results of internal and external audits; results of risk management; internal controls; board policies and compliance with annual return filings. The audit committee will discuss with organization management, any changes to internal controls and risk management reviews. Communication with the internal auditors over risk assessments and audit tests will help the audit committee in its risk management process.
  • The audit committee’s risk management includes its assessment on several factors that can have a significant impact on the organization. The audit committee being aware of these factors can help to ensure the organization reduces its exposure to risk of non-compliance with laws and regulations, as well as the risk of significant audit findings from both its external auditors and if applicable, audit findings from its funding sources. Some factors include having the required board policies, proper internal controls, compliance with funding source contracts, compliance with annual filing requirements (i.e. 990 and audited financial statements to the NYS Charities Bureau), reviewing and understanding the finances of the organization, compliance with regulations surrounding human resources, and ensuring there are proper information technology policies and security in place.

Each of these webinars and materials are available on our website. Please share them with your audit committee. We also provided an audit committee self-assessment guide. We recommend reading this over and performing your own self-assessment to ensure the audit committee is functioning in the manner it was designed and that best fits the organization.

This article was also featured in our newsletter NFP Advisor Vol. 23

Tania Quigley, CPA

Tania Quigley has been a member of Cerini & Associates’ audit and consulting practice area for ten years where she focuses on serving the firms nonprofit and employee benefit plan clientele. Tania has experience in performing financial statement audits and reviews, tax return preparation, cost report preparation and filing, retirement plan audits, and other consulting. Tania brings her expertise, diversified background, and helpful approach to all of her engagements.