Nonprofit Insurance Program

Nonprofits Opting Out of State Unemployment Taxes

By Alexa Connelly
October 12, 2012

There are many nonprofit organizations that are making a choice of opting out of state unemployment taxes since they can save money for the most part. With the unemployment rate reaching as high as 9.6 percent throughout the United States, many nonprofit organizations find it best to opt out. A law created in 1970, Section 3303 (e) permits nonprofit organizations to opt out of paying state unemployment tax by reimbursing the state they are located in only for the unemployment claims the state paid out to former employees of the organization. This could reap great benefits, but there could also be a major downfall if there are many former employees that make a claim.

Since 2010, there have been increasing numbers of 501 (C)(3) organizations that have decided to opt out of paying unemployment taxes. Since 2005, the average paid out in tax by nonprofit organizations was $2.20 to every $1 paid in claims. Therefore, organizations could benefit greatly if there are few former employees that choose to file for unemployment and claim their money. By not opting out, the organization could end up paying much more than necessary. As the recession continues, there are many states who have no more money left to pay unemployment benefits, leaving them to turn to the Federal Government for help and receive loans that have reached more than $35 billion. Nonprofit organizations that choose not to opt out could end up paying more than the already inflated amount of taxes presents. This could be the best decision for the organizations the that employ more than 10 people.

It is highly recommended for any 501 (C)(3) organization owner along with managers to become trained and educated in paying unemployment taxes. Seek professional help for guidance in order to help save time, maximize benefits, reduce risks of paying a fortune in taxes, and to become more well rounded on your knowledge of what the best overall decision would be when choosing to opt out of state unemployment tax. Professional groups that are trained in taxes for organizations can help any 501 (C)(3) organization make the best decision.

For each nonprofit organization, savings from opting out of state unemployment tax will vary, depending on how many employees there are and were and how many choose to claim for unemployment. If the organization chooses not to opt out then they could pay inflated amounts of unemployment that would cover claims of other employees or even the deficits of the state. The choice of opting out can be done any time throughout the years that the organization exists. The nonprofit can determine that if they are paying too much over the course of say, two years, they can choose to opt out for however long they choose. Therefore, whatever decision made can be changed at any time.

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