It’s been dominating headlines for weeks, but how informed are you about how health care reform will affect you and your organization?
Today, I wanted to examine how the now-signed health care reform bill will affect nonprofits. Specifically, I want to take a look at how small-staff organizations can take advantage of the small employer health credit.
The original version of the bill offered tax-income credits to small employers, not tax-exempt organizations. However, by adopting the Senate version of the health care reform bill, the House of Representatives agreed that tax-exempt nonprofits and small businesses could both qualify for tax credits.
The Small Employer Health Credit is intended to help all small businesses — both for- and non-profits — provide health insurance to their employees.
Basically, there are going to be two phases.
The first occurs between 2010 and 2013. Small nonprofit employers can take a credit (in the form of 25 percent of the employer contribution for employee insurance premiums) and then apply the credit to taxes withheld through payroll. According to councilofnonprofits.org, “employees would still get full credit for taxes withheld from their pay.”
In 2014, the amount of credit will increase to 35 percent.
If your small-staff organizations has 10 or fewer workers and average annual wages don’t exceed $25,000, the full 25 percent credit can be applied to the total amount of actual premiums paid by the employer. To qualify, the nonprofit has to pay at least 50 percent of employee premiums.
If you have more than 10 employees, or if the averages wages exceed $25,000, there’s a sliding scale. Here’s what I found from councilofnonprofits.org:
How much is the credit if I employ more than 10 employees and/or if average pay is more than $25,000?
The calculation of the phase out is complicated and should be determined with the help of an accountant. Here is a general rule of thumb for estimating the benefit of the credit:
Subtract from 25% (.25) either or both of the following calculations.
Number of Employees: Start with the total number of full-time equivalent employees, subtract 10 and divide by 15. Multiply .25 by this new number. (A nonprofit with 15 employees subtracts 10 to come up with 5, and divides by 15 for a fraction of 1/3 (0.33). Multiplying .25 by .33 establishes a Number of Employees deduction of 8.25% (.0825).
Average Wages: Subtract 1% (0.01) for every $1000 in average salary in excess of $25,000. For example, average annual wages of $30,000 would reduce the credit by 5% (0.05) (i.e., $30,000 – $25,000 = $5,000, and subtracting 1% for each $1,000 leads to a reduction of 5%).
In the example given, the maximum credit would be reduced from 25% to 11.5%
Maximum credit – Number of employees reduction – Average wage deduction = Estimated credit value
Using the numbers from above: 25.0% – 8.25% – 5.0% = 11.75%
So if this small nonprofit employer spends $10,000 annually in insurance premiums, it could claim a credit of $1,175 for the year.
A little confusing? Trying to read that many numbers makes my eyes glaze over. The general formula is somewhat complicated, and your accountant will probably come in handy to determine how much credit you can employ.
The credit is available immediately through 2013. Nonprofits regularly send three payroll taxes to the IRS: the employer and employees’ share of Medicare withholding and the federal income taxes withheld by the employer on behalf of the employee. Small employers can claim the credit against those three taxes.
There are more than 1.5 million registered nonprofits in the U.S. By providing this credit, the health care reform bill will allow many of them to provide health insurance to their employers that weren’t able to before.
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