Non-Profits: Stop Overpaying Unemployment Payroll Taxes
As a Nonprofit, the high cost of unemployment tax can become burdensome to a budget and staff that is already stretched thin and it is difficult to impossible to pass this cost on to donors. Paying less in taxes means using your resources efficiently in key priority areas of fundraising or staff.
As a Nonprofit, YOU decide How to Pay BenefitsIn all states, 501(c)(3) Nonprofit organizations may pay for unemployment claims in one of two ways: A) Automatic rate through the state unemployment insurance tax (SUI), or; B) Paying the state only for claims paid out to former employees as a reimbursing employer. Many Nonprofit organizations automatically choose the rate payment SUI route and do not realize that they have the second option which may end up saving them huge amounts. Here are the pros and cons of paying automatic rate SUI taxes vs. reimbursing the state.
Option A - Tax Rate PaymentMany Nonprofits continue to use the tax rate method to pay unemployment insurance taxes. State agencies compute your annual payment using a series of tables and data from your organization. Organizations are bumped up to a higher tax rate for a number of years based on factors including: number of claims filed in the previous year by former employees, size of your payroll, and projected growth of the organization. The primary advantage of the tax rate payment option is the lack of surprises in budgeting. Nonprofits using this method know the tax rate they will pay for the coming year and can project the annual cost based on the taxable payroll. For example, if your organization's claims totaled to be more than your taxes the state unemployment department will still cover the claims in the current year although the organization should expect a tax rate increase in coming years. Unemployment taxes range from 0.1% to 10.9% on each employee's taxable wages (that's $7,000 - $13,000 per employee) depending on the state in question. Even after unemployment rates have decreased or become more stable, many states (including California) have increased the tax rates employers must pay because states need to refill their depleted unemployment insurance pools. Commonly, this translates to Nonprofits paying more in taxes than the state is paying for its claims. California employers are paying taxes under the highest schedule rate allowable under state law, 5.4%. Since 2004, I have come across quite a few Nonprofits in California that were paying up to 4$ or more in taxes for every 1$ the state was paying out in claims! With the assistance of legal counsel, these Nonprofits switched over to the reimbursement method within a few months and stopped overpaying taxes.
Option B - Reimbursement MethodSection 3309 of the Federal Unemployment Tax Act enables 501(c)(3) organizations to opt out of the tax system and reimburse the state only for unemployment claims the state has paid out to the Nonprofits' former employees. The reimbursement payment method may calculate to huge cost savings for Nonprofits. This is especially true during this time when state unemployment agencies continue to increase tax rates for employers in order fill depleted or insolvent insurance fund pools. Depending on the size of the organization and amount of annual turnover these cost savings may add up to tens of thousands to hundreds of thousands of dollars in a few years if not annually. Nonprofits electing this method of payment must pay in the current year for all the claims paid to their former employees by the state, regardless of the amount. Therefore, a reimbursing employer must anticipate liability for claims that may lead to an unexpectedly large tax bill to avert unexpected expenditures against the annual budget. In addition, unlike option A, reimbursing employers do not get 'relief of charges'. Thus, if an employee resigned from your organization, went to work for another company, was terminated, and filed for unemployment, your Nonprofit could be charged for a portion of that employee's benefits (even though the employee voluntarily left you). The successful reimbursing employer puts tracking processes in place to review annual unemployment claims costs and budgets appropriately for unemployment expenses. If your organization is considering becoming a reimbursing employer, management should learn about the base period and benefit year in your state so adequate funding can be set aside in the annual budget to cover potential claims by employees eligible for unemployment benefits (generally a claim can be paid out over 26 weeks - without Federal extensions of benefits).
Decide CarefullyDo your homework to evaluate the opportunity. The reimbursement option works best for Nonprofits of a certain size and sophistication. An employment law attorney that specializes in representing and counseling employers can give you more information to determine the opportunities and risks particular to your Nonprofit.