COVID-19 Frequently Asked Questions

Helping nonprofits beat unemployment taxes

By February 10, 2020June 2nd, 2020No Comments

The national unemployment rate hovered near 4 percent for much of 2019. The tight labor market and economic health of the nation has meant that many employers are seeing their unemployment insurance liabilities stabilizing.

Even with these reduced costs, about 86 percent of 501(c)(3) nonprofits with budgets over $2 million will overpay their state unemployment insurance (SUI) liability. They will pay more in state unemployment taxes than they normally will ever incur in actual unemployment claims.

Therefore, many nonprofits choose to control their unemployment costs by paying claims as they go – reimbursing – instead of paying a state unemployment insurance (SUI) tax. They reimburse the state dollar for dollar for benefits that were paid to the organizations’ separated employees. Changing how they finance their unemployment obligations to the reimbursement method is an under-leveraged and sometimes altogether unknown long-term cost cutter for nonprofits.

SUI tax rates vary by state but are generally based on formulas that consider employers’ unemployment claims experience, taxable payroll and reserve account balances. It is for this reason that many nonprofit organizations see their tax liabilities as being much greater than the cost of their actual claims.

With Help from Unemployment Trusts

Unemployment Trusts began to pop up on the West Coast a decade after the IRS changed rules surrounding unemployment and allowed 501(c)(3)s to reimburse states for the cost of unemployment benefit claims. Trusts, often created by small groups of nonprofits, are designed to help nonprofits better manage SUI liabilities by sharing administration costs of their programs across program participants. There are nearly a dozen operating across the country today. Trusts make reimbursement payments on behalf of nonprofits, provide claims management, offer HR consulting to help mitigate unemployment risk.

Trusts often base nonprofits’ contribution rates on claims experience, anticipated costs and other variables. Contributions can also be based on an assigned rate and actual taxable wages. Nonprofits are also charged an administration fee by trusts, but contribution rates usually include that fee.

Unemployment Trusts also make available, for a price, stop loss insurance that protects agencies from unforeseen layoffs – a significant risk for organizations paying as they go. Stop loss insurance covers nonprofits by giving them a predetermined deductible and paying for unemployment benefits up to a certain limit of insurance.

Before accepting members, Trusts analyze nonprofits’ past SUI claims and produce a cost-saving estimate. These estimates are used by nonprofit executives to determine if reimbursing is a good choice. Trusts usually find significant SUI tax overpayments for organizations with gross annual payrolls over $1 million.

Unemployment Trusts typically operate by creating individual, segregated accounts for their members. They pay state unemployment benefit bills on behalf of all their members from these accounts. Monies held in Trusts are the exclusive property of the member organizations. Typically, members can access their individual accounts if needed for other mission needs. If an organization leaves a Trust, they take their remaining funds with them. This differs from the state system, which creates individual accounts but retains exiting nonprofits’ reserves. State programs operate as risk pools. So called “reserve accounts” that are managed by states make up the risk pool. Employers – for-profit or non-profit – cannot access those funds.

Switching to reimbursable employer status and joining an unemployment program can be beneficial for diversely funded nonprofits (those not solely dependent on one stream of funding) employing more than 15 full-time employees and experiencing low turnover.

Reimbursing avoids tax increases

Another reason to exit the SUI tax system is that states may raise and lower tax rates depending on the economic climate. For example, most states dramatically raised their SUI taxes to cover rising unemployment during the Great Recession and other less disruptive economic slowdowns. Reimbursable employers are not subject to SUI tax increases.

During the Great Recession most states were forced to borrow money from the federal government to cover the billions of dollars in unemployment claims being paid to out of work Americans. These states were then forced to not only increase SUI rates but create additional SUI fees that directly addressed paying down the federal loans. In most states, these additional SUI fees did not apply to those employers who had reimbursable accounts.

Since the recession, most SUI programs have stabilized. However, its generally believed that most state programs are still not healthy enough to handle even a slight economic dip without again being forced to borrow federal dollars. Which means returning to increased SUI tax rates.

(Further reading on this topic:

Not for everyone

For nonprofits with fewer than 15 employees, gross payrolls less than $1 million, or organizations that rely heavily on one source of funding, the SUI tax system is probably more cost-efficient.

Nonprofit organizations who pay the tax today may discover, through analyzing their experience, that the tax system is the best place for them. These organizations should continue to perform an unemployment costs analysis on a year to year basis because making a change could prove greatly beneficial in the future. Reimbursing should be addressed as a long-term financial decision and not a quick fix.

All states have deadlines to change status from taxpayer to reimbursable employer, generally between November and January. Some states such as California and Minnesota allow nonprofits to switch in any quarter, though the optimum time is before first quarter payroll taxes are due.

To learn a state’s deadline, click here. Those organizations that are considering leaving the state pool should make themselves aware of the length of time they must remain outside the tax system as a reimbursable employer before being allowed to return as a SUI taxpayer. The time period is usually 1-2 years but can be as long as five years.

Calculate Your Overpayment

Even though all 501(c)(3) nonprofits have the option to not pay their state unemployment insurance (SUI) taxes many still do. What results are massive overpayments. Our industry estimates indicate that 86% of nonprofits are overpaying their state unemployment costs. *

Calculate your organization’s state unemployment insurance (SUI) overpayment today using our SUI Overpayment Calculator.

After completing your calculation, we will show you a full suite of options that you can choose from to replace your SUI taxes – and save thousands of dollars annually.

About Us

501(c) Services, a 100% employee owned organization, has more than 35 years of experience in providing full-service alternatives to state-run unemployment insurance programs, and provides services to over 1,500 nonprofits nationally. We administer the 501(c) Agencies Trust, which offers a comprehensive suite of risk management services and multiple stop-loss protection solutions for its 501(c)(3) nonprofit members, and UInsure, a first dollar unemployment insurance program for 501(c)(3)s, government entities, and tribally owned businesses. We also operate Nonprofit HR Services – a confidential resource available to help walk nonprofits through difficult personnel issues.

*Based on results reported from over 500 taxpaying nonprofits contacted by 501(c) Services.