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.
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.
What will become of the clergy housing allowance? We have been following the legal developments a 2013 Wisconsin federal district court case, which struck down the venerable income tax benefit as unconstitutional. The case is now on appeal before the Seventh Circuit Court of Appeals. See Freedom from Religion Found., Inc. v. Lew, 983 F. Supp. 2d 1051 (W.D. Wis.