Should you opt out of the state’s unemployment tax?
By Philip Bond, volunteer trustee for UST
If your organization were counseled to stop using the alternative postal rate offered to nonprofits, it would seem like strange advice wouldn’t it? Since Congress and the U.S. Postal Service specifically provide a special rate for nonprofits to send their mail for 24 cents per piece instead of 44 cents, why wouldn’t you opt to pay less?
The choice seems obvious, but there is another alternative provided under federal law that many nonprofits are not currently using to their advantage—even though it could save them thousands of dollars.
Section 3303(e) of the Internal Revenue Code allows nonprofit organizations and local government entities to use an alternative method to pay for state unemployment compensation. They are allowed to opt out of the state unemployment insurance (UI) tax system and instead reimburse the state only for the unemployment benefits paid out to their own former employees.
Given the choice, most for-profits would jump at this opportunity, because employers that pay into the state UI system typically pay about $2.00 in taxes for every $1.00 paid out in benefits to laid-off workers. But only 501(c)(3)s and local units of government can opt out and become a “reimbursing” employer, simply paying the state for their own agency’s unemployment claims—dollar for dollar—and saving valuable unrestricted funds.
