Should Your Nonprofit Participate in State Unemployment Insurance Program?

Posted April 6, 2015 by Eric Tiffany in Business

In most cases, nonprofits that qualify as 501 (c) (3) organizations must pay state unemployment taxes.  State unemployment taxes are based on two factors: claims history and payroll.  Nonprofits with many claims pay higher taxes than those who file fewer claims. At this point in time, most states are currently paying out far more in unemployment benefits than they are receiving in revenue. Many states have had to increase unemployment taxes to get out of the red.

Unlike other businesses, a 501(c)(3) nonprofit organization has the option of opting out of its state unemployment insurance program. Instead of paying a set amount of unemployment tax to the state every year regardless of how many of its employees file claims, it reimburses the state only for unemployment claims the state actually pays out to its former employees. This can be a huge benefit to the nonprofit, because they typically pay more in unemployment taxes than the state pays out for the nonprofit’s former employees’ claims.  Nonprofits have the ability to save anywhere from 10% to 40% on their unemployment taxes by opting out of their state’s unemployment insurance program.

But there are glaring risks to choosing this method. If your nonprofit is forced to lay off a considerable amount of staff, the unemployment costs it will have to reimburse the state could far exceed the unemployment tax it would otherwise have had to pay. This risk is much greater now than in the past because many nonprofits are experiencing a decrease in public funding. To reduce these risks, thousands of nonprofits have joined grantor trusts that pool money from many organizations to pay off future claims. It is also possible to purchase private insurance to cover claims.

The reimbursement option works best for larger nonprofits with stable employment. Nonprofits with fewer than ten employees or that have regular layoffs, are usually not good candidates for opting out of state unemployment taxes.