State unemployment insurance taxes affect almost all organizations. No matter how small or large your organization, payroll taxes are charged by the state to fund the state unemployment insurance program and are the sole the responsibility of the employer.
State unemployment tax rates can be very difficult to determine and are directly related to the termination practices of your organization and how well it handles individual unemployment claims. State unemployment insurance taxes are individually assigned to each employer every year, and states uses their own unique experience-rating systems to determine an employer’s tax rate. Although these systems vary in how they’re actually administered, they try to assign lower tax rates to employers who have lower turnover and fewer involuntary terminations and higher rates to employers who have a higher turnover rate and more involuntary separations.
For many nonprofits, this rating system along with the state tax per employee can create administrative headaches and cost budgets tens of thousands of dollars. Even though nonprofits historically have lower turnover rates due to various factors, they tend to have fewer resources available to manage the wave of administrative paperwork that comes with unemployment insurance claims processing. But unlike most unavoidable expenditures incurred by nonprofits, the headaches caused by unemployment insurance taxes and claims administration can be strategically avoided by 501(c)(3) organizations.
To begin with, 501(c)(3) organizations aren’t required to pay state unemployment taxes. They are only responsible for reimbursing the state for any unemployment insurance claims for which they are liable.
That exemption for 501(c)(3) nonprofits was created in 1972 when a new section (Section 3309a) was added to the Federal Unemployment Tax Act as contained in the Internal Revenue Code. It states that state unemployment programs must allow 501(c)(3)s to elect whether (a) to contribute to the state program in accordance with state law or (b) to pay into the state program annually an amount equal to the actual unemployment benefits paid out by the state program on account of employment services previously provided to the organization.
In short, nonprofits have the option to only pay the unemployment claims for which we are liable – dollar for dollar. Traditionally, “opting out” saves nonprofits on average about $30,000 per year.
For nonprofits that are “reimbursing employers” the unemployment insurance tax drain of budgets becomes nonexistent. The only headache they have left is with the unemployment claims administration of the tax filing and the handling of the unemployment claims themselves. To deal with the administrative issues, many nonprofits save time and money by outsourcing this work to specialized nonprofit unemployment trusts actually created by 501(c)(3)s for the very purpose of handling these issues.
Once an organization begins working with a nonprofit unemployment trust, unemployment becomes a strategically managed and outsourced function like payroll or benefits. Working with such administrators not only provides immediate relief from seemingly inescapably high unemployment insurance tax rates, but they also help identify and correct the root causes for unpleasant separations. With the help of a nonprofit unemployment trust, your experience ratings become stable and predictable. Your organization actually starts to avoid unemployment claims liability.
Part of the service offering of a nonprofit unemployment trust includes a nonprofit dedicated compliance management program that assists with a wide range of services, including:
- State unemployment insurance tax regulation compliance
- Creation and management of a dedicated unemployment claims liability fund
- Full service unemployment claims administration
- Review, expansion and development of liability-reducing employment policies
- Free consultation on all your nonprofit HR activities
- Availability of reporting tools to identify and improve avoidable unemployment insurance liability and trends
All of this affords nonprofits unique avenues that allow them to strategically handle unemployment claims administration and unemployment insurance taxes in ways that for-profits can only dream about.
501(c) Agencies Trust is a nonprofit grantor trust as described above. We are the oldest and largest such organization in the country. Contact us today to see if we can provide unemployment insurance savings and administration for your 501(c)(3).
