Multi-Site Nonprofit Employers and Unemployment Coverage (Part 2)

As explained in our law firm’s prior blog article, nonprofit employers enjoy special privileges under unemployment laws.  For example, nonprofit employers are “covered” by such laws only if they have at least four employees during at least 20 weeks of a calendar year.  (Note that churches and other religious institutions are categorically exempt.)  But what happens if a nonprofit has at least four employees scattered among multiple states?   

For example, consider a nonprofit organization with two employees working at its office in Illinois, one employee working remotely from Seattle, and two employees working remotely from Mississippi.  Is the nonprofit “covered” for unemployment tax purposes?  Must it pay unemployment taxes into each state system?  Or is the nonprofit completely exempt, since it does not have at least four employees in any one state?  This is an increasingly common employment scenario, so a good understanding is important for effective legal compliance.

A.             Four Tests to Determine Jurisdiction

In situations where employers have employees performing in multiple states, such employers must pay unemployment tax to the state to which tax is owed.  States have generally agreed upon a four-step analysis to determine the state to which unemployment tax is owed.  With the exception of the third test, the tests refer to factors pertaining to the employee.  The below tests are to be performed consecutively, in the order specified, for each of the multi-state organization’s employees.   

Unemployment Taxes for Nonprofits

Nonprofit organizations enjoy special privileges under unemployment laws. What are the privileges, and how can they benefit your organization?  For most nonprofits, the following rules apply: (a) only state law unemployment taxes are owed, not federal; (b) smaller may be better; and (c) self-insurance may provide cost savings (but not always!).  Additional tax considerations apply for covered nonprofits operating in multiple states.  Notably, churches and other religious institutions are entirely exempt from unemployment coverage.

Welcome Relief: Clergy Housing Allowance Upheld

Welcome News

The clergy housing allowance is safe for now.  Last week, the Seventh Circuit Court of Appeals reversed a Wisconsin federal district court, which struck down the venerable clergy housing allowance.  As a result of the Seventh Circuit’s decision, clergypersons who serve churches, synagogues, mosques, and other worshipping groups, may continue to exempt certain parts of their compensation from federal income tax.