Obama Proposes New Tax Credit for Nonprofit and Other Employers

President Obama has announced a proposal to help small employers—including nonprofit groups—hire workers and raise wages.

The plan, part of a broader White House effort to bring down soaring unemployment, would give companies or nonprofit organizations a $5,000 federal tax credit for every net new employee they add in 2010 and reimburse them for any taxes they owe to Social Security because they have a bigger payroll.

Nonprofit groups, which are exempt from income tax, would qualify because the credits will be applied to federal payroll taxes that employers pay on behalf of their employees, a senior administration official told reporters.

The official said the White House expects more than one million companies and organizations to take advantage of the credits, for an estimated cost of $33-billion.

No Gaming the System

The package is designed to give a push to employers who see the economy growing but are “a little nervous about hiring somebody today rather than maybe waiting an extra six months,” the official said. “This is about telling them, Go ahead, hire today.”

While any employer can apply for the credits, the plan—which would be retroactive to January 1—would impose a $500,000 cap on the total credits earned, so it is most likely to appeal to small entities, the official said.

Some details of the proposal, which must win approval from Congress:

• The credit for new employees would apply to net hires. An employer that laid off 10 workers and hired five back would not qualify.
• Employers could not “game” the system by firing workers and replacing them with new hires or laying off people and replacing them with lower-paid employees.
• The credit for increased wages would apply only to salaries that are subject to Social Security taxes, currently set at a maximum of $106,800.
• Employers could apply for the credits quarterly.