Opting out of SUI tax pools can help offset new costs encountered by nonprofits

February 5, 2014

Opting out of SUI tax pools can help offset new costs encountered by nonprofits

Nonprofits around the country are holding their breath to see if payment in lieu of tax programs will take hold in their areas. PILOT programs have gained steam on the east coast, according to MiBiz, and could represent a new budget hurdle for tax-exempt organizations.

Under the program, municipalities have the ability to send invoices and bills to nonprofit organizations, regardless of their tax status. Not all nonprofits have been treated equally under the legislation, with many states going after colleges and universities. In many areas, the new program is not a huge surprise.

The reason behind the program in most municipalities is that local governments are struggling to generate revenue so they can begin climbing out of the financial pits that were created during the recession. Massive unemployment and government cutbacks left many local governments in a tough situation.

Nonprofits must shore up budgets to prepare for new costs
Regardless of how nonprofit leaders feel about the legislation, it's another example of why they will need to continue to get creative with budgets and revenue. Many organizations are also feeling budget pressures and during a time when their services are needed most. Increased demand and costs coupled with falling revenue have created the perfect storm for many nonprofits.

Nonprofits can save on unemployment insurance
While the PILOT program represents a hardship for tax-exempt organizations, they are still extended one large cost-saving benefit – the ability to opt out of state UI tax pools. Nonprofits are exempt from federal taxes related to UI, but still must contribute for their state costs. Federal taxes cover most of the administrative costs of running unemployment offices while state taxes provide funding for claims.

For-profit businesses pay a tax every year regardless of their actual UI claim costs, nonprofits can become self-reimbursing employers, a designation under which they reimburse the state only for the actual amount that was paid out to former employees. This means that a nonprofit with no UI claims would have no costs.

The downside is that organizations which opt out can be responsible for a large cost if they see a sudden spike in UI claims and will not have money from the tax pool to help meet the obligation. For this reason, nonprofits that opt out should consider enrollment in a UI savings programs or bonded service program such as those offered by First Nonprofit Companies. Saving programs allow nonprofits to capture many of the benefits of being a self-reimbursing employer with much less risk.

There is a not a one-size-fits-all solution for self-reimbursing employers so it's important to get in touch with a nonprofit UI specialist that can explain how different funding options will save the most money while providing the greatest amount of coverage. Depending on their size, most nonprofits can find a more cost-effective option for meeting their SUI responsibility.

For information on how your organization can cost-effectively meet its unemployment insurance needs, contact First Nonprofit Companies at FNCUI@firstnonprofit.com or visit www.firstnonprofitcompanies.com.

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