Unemployment Tax Savings

Unemployment tax can be a significant cost for employers. Normally a tax is paid based on employee wages and unemployment claim history. Some nonprofits are unaware they can opt out of paying this tax. Instead, nonprofits can become reimbursing employers and only pay claims that are paid out.

In this economic environment, there is some risk associated with this option. When paying the unemployment tax, there is often budget certainty for the current year. (Future years are uncertain as the tax rate changes based upon claim history.) Opting out of the tax and reimbursing the state for claims can end up costing more if the organization has a large number of claims in the first year as a reimbursing employer.

To mitigate this risk, a stop gap insurance policy can be obtained to payout any claims over the set limit. Of course, if that threshold is reached in any year, the insurance policy will become much more expensive to obtain in future years.

Is this right for your nonprofit? Evaluate your organization's past unemployment claims and the likelihood of future claims. If future claims are likely due to the recession or funding difficulty, this may not be the right time to make this change. However, if your organization was forced to recently undergo layoffs and more staffing cuts are unlikely, this might be the perfect time to become a reimbursing employer.

Potential savings vary based on the size of the organization, but it is possible to reduce the total cost of unemployment insurance and tax expense by more than 65%.