Tax Credit Fairness for Nonprofit Employers
Nonprofit organizations, despite being major employers and economic contributors, are excluded from numerous employer tax incentives available to for-profit companies. This disparity hampers nonprofits’ ability to hire, retain, and support their workforce, which makes up over 10% of non-governmental jobs in the United States. To address this problem, Congress should expand the eligibility criteria of certain federal workforce tax incentives to include nonprofits.
The Issue
Every day, nonprofits provide essential services to their communities. As the third-largest workforce in the country, the nonprofit sector is made up of problem-solvers, decision-makers, and local advocates. And despite their “tax-exempt” status, nonprofits pay an estimated $65 billion each year in federal payroll taxes.
But while nonprofits are an undeniable asset to their communities and the economy, they are unfairly excluded from many employer incentives that are tied to the federal income tax.
What’s at Stake?
Nonprofits face significant challenges when it comes to hiring, offering benefits, and training and retaining employees. Access to key employment-related tax credits would greatly reduce the burden felt by many organizations struggling to hire and support their workers. It would also make those tax credits more effective by allowing them to reach a significant new population.
For example, nonprofits cannot currently claim the Employer-Provided Childcare Credit or the Employer Credit for Paid Family and Medical Leave. Given the imbalance in caregiving that disproportionately affects women, access to these credits would be particularly powerful in a sector where two-thirds of the workforce is female.
A Fair Policy Solution
Congress created these incentives to increase hiring and expand benefits for workers, but they will never meet their policy goals if they are missing a crucial swath of the U.S. economy. American voters agree: 84% support extending federal business tax credits for offering employees child care, retirement plans, or paid family leave to nonprofit employers.
To address this disparity, policymakers must make the following tax incentives available to eligible nonprofit organizations:
- Employer-Provided Childcare Credit
- Work Opportunity Tax Credit
- Employer Credit for Paid Family and Medical Leave
- Indian Employment Credit
- Small Employer Pension Plan Start-Up Cost and Automatic Enrollment Credit
- Disabled Access Credit
For more details on these tax credits, see links above to information from the IRS, or download Independent Sector’s Tax Credit Fairness for Nonprofit Employers white paper.
To do this, Congress could continue to follow the blueprint of the Employee Retention Tax Credit, which is structured as a credit against payroll taxes. By allowing tax credits to be applied against payroll tax liability — not just the federal income tax — policymakers can better support hiring and retention initiatives in the nonprofit sector. This method has been adopted in the Small Nonprofit Retirement Security Act, legislation Independent Sector strongly supports to make the Small Employer Pension Plan Start-Up Cost and Automatic Enrollment Credits available to nonprofits.
Ultimately, Congress must recognize nonprofits as significant taxpayers and employers by expanding eligibility for these workforce incentives. Such changes would not only enhance the effectiveness of these policies but also strengthen the nonprofit sector’s ability to serve communities across the country.
