by Mark Jones

I’m one of those nerds who actually enjoys reading government regulations. For me, it’s kind of like a treasure hunt, and it paid off the other day. I found an important nugget in the notices published recently regarding the Small Business Health Care Tax Credit for Small Employers (a component of the Affordable Care Act passed earlier this year), which are just now showing us exactly how the IRS will provide this credit to employers that qualify.

If you aren’t familiar with this tax credit, ministries qualify as non-profit employers. To be eligible, your ministry must:

  • Have fewer than 25 full-time equivalent employees (FTE) for the taxable year (Any “minister” as defined by the IRS is not included in this 25 employee limit.)
  • Have average annual wages for eligible employees of less than $50,000 per FTE
  • Have a qualifying health insurance coverage plan

Eligible ministries can qualify for a tax credit of up to 25 percent of their insurance premiums, which could be a substantial amount. However, and this is the important nugget that surprised me, the credit is limited to the total of the following:

  • A nonprofit’s income tax paid (which is zero for most ministries unless they are subject to unrelated business income tax)
  • Medicare tax withholding
  • Medicare tax liability for the year

This means that if your church employs “ministers,” you pay no Medicare tax anyway, so your potential credit is limited to premiums paid for those staff members who are non-minister employees. Bottom line: For most churches the tax credit will be much less than 25 percent.

While the credit will be less than some originally thought, including me, it’s still important for ministries to take advantage of it. Doing so amounts to good stewardship of God’s resources, especially as you try to figure out how much to budget for health care expenses in 2011.

For more information, including instructions and forms, visit this IRS website.

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  1. Lawrence Bates @ 2011-01-05 10:54

    Few ministries pay any income tax. My conclusion is that this credit will be available to very few not-for-profit ministries (especially churches). You sound much more optimistic. What am I missing?

  2. Mark Jones @ 2011-01-05 13:55

    Lawrence – great question. Let me try to clarify:

    You are right. Most nonprofits don’t pay federal income tax. However, you probably have staff (non-”ministers”) whom you’ve withheld Medicare tax at 1.45% and have paid the additional 1.45% Medicare tax the employer is responsible to pay whenever you make your federal tax deposits. This tax paid does qualify towards the tax credit.

    It is important to make sure your organization meets the eligibility requirements mentioned. I believe that many nonprofits will meet these requirements and be eligible for the tax credit.

    You can go back and look at the total amount of Medicare tax withholdings and Medicare tax the organization paid for 2010 and determine an amount the tax credit would be limited to. Look for the ability to claim this tax credit on your quarterly IRS federal 941 tax form as well completing IRS form 8941. For all the details, refer to the IRS link provided.

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