New Bill Lets Small Nonprofits Use Retirement Credits to Cut Payroll Taxes Starting 2025

If you work for a small charity, a local museum, or any other tax-exempt organization, this bill is about making sure you get access to a retirement plan. The Small Nonprofit Retirement Security Act of 2025 is simple but impactful: it changes how small non-profits can use existing federal tax credits designed to encourage setting up retirement plans. Starting in 2025, these organizations can take the value of those credits and use them to directly offset the Social Security payroll taxes they owe, making it cheaper and easier for them to offer 401(k)s or similar plans.

The Payroll Tax Hack for Nonprofits

Previously, tax-exempt organizations often struggled to maximize these retirement incentives because they don't pay income tax, which is what most tax credits offset. This bill solves that problem by letting them use the credit against their payroll tax liability (specifically, the employer's portion of the Social Security tax under Section 3111(a)). Think of it this way: instead of waiting for a refundable credit or having a credit they can't fully use, a small non-profit now gets an immediate, dollar-for-dollar reduction in the cash they have to send to the IRS every pay period. This applies to the credit for setting up a new plan (Section 45E) and the credit for adding automatic enrollment (Section 45T).

What This Means for the Real World

Imagine a small community theater with 15 employees. Setting up a retirement plan costs time and money, often hundreds or thousands of dollars in administrative fees. Under current law, they might qualify for a credit, but the mechanism is clunky. Under this new bill, if they qualify for a $5,000 startup credit, they can instantly reduce their required employer Social Security payroll tax payments by up to $5,000 for that year. This makes the initial cost of offering a plan far less painful, removing a major barrier for organizations that usually run on tight budgets.

This is a straight-up win for employees in the non-profit sector. Historically, workers at small non-profits often lagged behind their for-profit counterparts in retirement savings access. By making it financially easier for these organizations to offer plans, the bill directly expands retirement security for teachers, social workers, museum staff, and others who serve their communities. The credit amount is capped, meaning the non-profit can't claim more than the actual payroll tax they paid that year, which keeps the system balanced.

Keeping the Social Security Trust Funds Whole

One detail that often gets overlooked in tax legislation is the funding. When a tax credit reduces the amount of payroll tax collected, that money technically comes out of the Social Security Trust Funds. To prevent this, the bill includes a mandatory provision (Section 2) requiring that an amount equal to the revenue reduction be transferred from the General Fund of the Treasury directly into the Old-Age, Survivors, and Disability Trust Fund. This is a crucial step that ensures this new incentive doesn't inadvertently weaken the Social Security system; the General Fund absorbs the cost of the tax incentive, not the Trust Fund.