Who Pays for Unemployment?

The truth behind who pays for unemployment and the often-overlooked hidden costs may surprise you. While many believe individuals pay into a fund, HR and finance staff will tell you that it is employers, including nonprofits, who usually foot the bill*.

501(c)(3) nonprofit, governmental, and tribal entities are all exempt from paying Federal Unemployment Taxes (FUTA). However, most employers must pay state unemployment taxes (SUTA), and only religious entities that operate exclusively for religious purposes are exempt from SUTA. But the following organizations have a unique savings option for paying SUTA:

  • Nonprofits: Organizations that are exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code
  • Native American Indian tribes: Tribes and their wholly owned businesses
  • Government entities: Government entities such as federal, state, and local government agencies

These entities can cover their mandatory unemployment costs in one of two ways:

  1. Paying the state unemployment insurance tax (SUTA)
  2. Reimbursement financing, also known as self-insurance, is a legal right allowing these organizations to opt out of paying SUTA. Instead, they can reimburse their state unemployment agency dollar-for-dollar for unemployment claims paid to former employees. This option can provide significant cost savings for these entities.

Though opting out of paying SUTA can save employers money in the short term, it’s crucial to have a well-thought-out strategic plan accompanying this decision to avoid budgeting volatility in the long term to cover claims costs. First Nonprofit (FNP) provides the expertise to assist nonprofit employers utilize this option, which can save organizations as much as 60% annually! Contact First Nonprofit to help determine eligibility for the best reimbursement option for your organization. Click here to request a free, no-obligation savings evaluation.

*Alaska, Pennsylvania, and New Jersey employees pay a small tax into their state employment fund.