State unemployment insurance taxes affect almost all employers. No matter how small or large your organization, payroll taxes are charged by the state to fund the state unemployment insurance (SUI) program and are the sole responsibility of the employer. Nonprofits, fortunately, can self-insure their unemployment program and not pay the taxes.
SUI tax rates can be very difficult to determine and are directly related to the separation practices of your organization and how well it handles individual unemployment claims. SUI taxes are individually assigned to each employer every year, and states use their own unique experience-rating systems to determine an employer’s tax rate. Although these systems vary in how they’re actually administered, states 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. Unlike most unavoidable expenditures incurred by nonprofits, the headaches caused by SUI 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 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 they are liable – dollar for dollar. Traditionally, “opting out” saves nonprofits on average about 30% to 60% of what they were paying in SUI taxes.
For nonprofits that are “reimbursing employers,” the unemployment insurance tax drain on budgets becomes nonexistent. The only administrative item they have to manage is the unemployment claims themselves. To deal with the administrative issues, many nonprofits get help by outsourcing this work to specialized nonprofit unemployment trusts created by 501(c)(3)s for the very purpose of handling these issues – an example of such a trust is 501(c) Agencies Trust.
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 inescapably high unemployment insurance tax rates but also help identify and correct the root causes of unpleasant separations. With the help of a nonprofit unemployment trust, employer experience ratings become stable and predictable. An organization actually starts to avoid unemployment claims liability.
Part of the service offering of a nonprofit unemployment trust includes a dedicated compliance management program that assists with a wide range of services, including:
- State unemployment insurance tax regulation compliance
- Creation and investment of 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 liabilities in ways that for-profits can only dream about.
501(c) Services, a 100% employee-owned organization, has 40 years of experience in providing full-service unemployment outsourcing programs and provides services to more than 3,000 nonprofits in 34 countries. We are the administrator of 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 501(c) HR Services, a confidential resource available to help walk nonprofit organizations through difficult personnel issues.
To see if your organization would financially benefit from our services, please contact us today.