Taxing Smaller Nonprofits Differently

I think most people are aware that nonprofits aren’t taxed on their net revenue. And in many state and local jurisdictions, they’re not even taxed on property. But one place where nonprofits are treated like other organizations is around payroll taxes. Like for-profit companies, there is a mandatory 15.3% payroll tax per employee.  Half of the 15.3% is taken out of the employees’ paycheck while the other half is paid by the nonprofit. This pays for Medicare and Social Security.

A recent editorial in the Chronicle of Philanthropy, by George Weiner, argues that nonprofits and their employees should pay less than for-profit companies when it comes to both the employee contribution as well as the employer’s portion for payroll tax. Arguments in the commentary include inflationary pressures and changes that for-profit companies can make to pricing, the community value of nonprofits overall, and lower wage levels for nonprofits compared to their for-profit employment competitors. All of these arguments, in isolation, argue favorably for the case of reducing the payroll tax burden on nonprofits and nonprofit employees. In fact, their arguments are that some enormous corporations don’t pay any profit taxes because of loopholes in the tax code.

I can’t argue that nonprofit employees, on average, are paid less than those in the for-profit world. I can’t argue that there’s a reasonable conversation about ensuring corporations at every level pay appropriate taxes. I’m certainly not going to argue that nonprofits are incredibly important to our communities. 

Here’s the problem. When those nonprofit employees retire, they’re going to want the same Medicare and Social Security benefits as those who paid in at a higher rate but worked for a for-profit company. In addition, Social Security and Medicare aren’t like savings accounts. People working today are paying for those who retired. And when today’s workers retire employed individuals at that time will pay for their Medicare and Social Security. If there was a massive change for nonprofits and those who work for nonprofits, it not only upsets the system today but adds a challenge to the argument of fairness and quality if not taxed for payroll at the same level. 

While I advocate and support anyone working in a nonprofit, it’s a choice. There are trade-offs. And there are consequences for decisions. Frankly, having spent most of my career working for nonprofits, I’m glad that I made those choices. But they were still choices. Changing the tax code to create differing levels of payment and benefits will have a direct effect on Social Security and Medicare and create more division in our country when we’re seeking less.