Is your religious organization liable for unemployment insurance tax? Certain religious nonprofits are indeed exempt from state unemployment insurance tax. It is important, however, that such nonprofits understand their specific state requirements for exemption, which may be very different from IRS exemption.. Depending on your state’s requirements, even being determined to be a “church” by the IRS may not be enough for state unemployment exemption.
Intro: Exemption for religious groups?
State unemployment insurance laws generally provide an exemption for certain religious organizations. Illinois is typical, providing exemption for churches, other religious institutions, denominations or similar associations and church-controlled schools
820 ILCS 405/211.3. But the statutory qualifications, and the courts' interpretations thereof, may vary from state to state. Religious employers thus should be careful to understand their particular state’s requirements. In addition, they should be aware that an IRS determination of “church” status or other religious exemption might not, in itself, be enough to qualify an organization for exemption under state unemployment law.
Consider the following recent example, where a nonprofit organization that served and was closely affiliated with a church was deemed not to qualify for the state “church” exemption from unemployment tax liability, despite the IRS’s recognition of “church” status.
Case: Close but no cigar
In Beverly Hall Corp. v. Unemployment Comp. Bd. of Review, the Pennsylvania court held that an organization, which was purported to be organized for religious purposes, did not qualify for the unemployment tax exemption. 2014 WL 7014088 (Pa. Commw. Ct. Dec. 15, 2014). In that case, an employee who had been terminated was held eligible for unemployment benefits, and his former employer liable for the cost of such coverage.
The employer in question, BHC, is a Pennsylvania corporation associated with the Church of Illumination (Church), a Pennsylvania nonprofit, at which members of the Rosicrucian Fraternity worship. Id. at *1. BHC’s activities are intended to advance the Church’s religious beliefs. In the words of the Church’s spiritual leader,
“[T]he Church of Illumination ha[s], since [its] beginnings, emphasized the importance of the purity of the body as it relates to the growth and advancement of the soul. As that was alluded to earlier in the — one of the meanings of the size of the pyramid. We are taught in Corinthians, in the New Testament, that we are the temples of the living God, and we are not to defile that temple, and the Church takes that quite seriously and to heart . . . Due to the increasing complexity of the ability to find what we consider to be organic, non-chemical, pesticide-free, spiritual food, for our temple, in 2009, Beverly Hall Corporation Board agreed to start a biodynamic -Beatrice Franklin Biodynamic Farm.”
Id. at *2. With the foregoing as the organization’s spiritual framework, BHC, which operates the farm where the employee worked, grew produce for the Church. In its argument, BHC relied on this spiritual framework, and the following additional support for its claim that the organization qualified for the exemption:
- The Church controlled BHC. The Church members elected each of the nine voting members and three nonvoting members of BHC.
- BHC produced testimony that the Farm is not profitable and that since its start, the organization has provided approximately $200,000.00 in subsidies.
- The Internal Revenue Service (IRS) determined in 1971 that BHC constituted a “church,” and that since that time, the Commonwealth of Pennsylvania re-approved and recertified its non-profit status.
For these reasons, among others, BHC argued it was a religious organization, and thus qualified for the exemption.
The court disagreed. The court noted that, according to the Church’s own spiritual leaders, BHC is “the entity that runs the logistics of the [C]hurch” by “maintaining the grounds, the buildings, [and] hiring the personnel needed to perform the [C]hurch functions.” Id. The court reasoned, “The only testimony regarding the purpose of BHC clearly establishes that it was created not for religious purposes, but to perform the administrative, non-theological work of the Church, such as ground and building maintenance and hiring.” Id. at *5. That the IRS had recognized the BHC as a “church” was not a determinative fact in this case. Indeed, “[a] nonprofit corporation responsible solely for managing the administration and finances of a religious organization is not ‘operated primarily for religious purposes.’” Id.(internal citations omitted).
The above case provides insight useful to nonprofit leaders in at least two important ways. First, all nonprofit organizations should be mindful of applicable state laws concerning unemployment insurance tax liability. In Illinois, under the Illinois Unemployment Insurance Act (“Act”) and subject to certain qualifications, if a nonprofit employer does not have, or has not had, four or more employees for at least twenty calendar weeks in a given year, the entity is considered exempt from the payment of contributions to the Illinois Department of Employment Security. Under the Act, employees of such an organization will not eligible to receive unemployment insurance benefits and must be notified of such ineligibility under the Act. Similar requirements may apply to nonprofits in other states. Nonprofits that conduct their operations in multiple states should further be aware of the complex requirements governing unemployment taxation in such scenarios. Please see our firm’s December 2014 blog article on multi-state unemployment insurance requirements.
Second, religious organizations seeking further exemption from unemployment insurance tax should be careful to understand the distinctions between exemption standards under federal and state law. Standards under many state-level taxation regimes, like unemployment insurance, are often very different than the base standard for federal income tax exemption under Section 501(c)(3). Religious organizations should therefore seek qualified legal counsel to determine whether state-level exemptions apply.