Should Nonprofits Pay State Unemployment Tax or Self-Insure?

Nonprofits that qualify as Section 501(c)(3) organizations don't need to pay federal unemployment taxes. However, most nonprofits must still pay a share of the state unemployment insurance tax. Unlike for-profit companies, nonprofits have flexibility on how to fulfill their unemployment insurance obligations. A nonprofit can either pay into their state unemployment tax program, like any for-profit employer, or self-insure by reimbursing the state for unemployment claims paid out to their former employees.

Most nonprofits find savings by electing to reimburse the state for unemployment claims. But how does it work, and is self-insurance always the best choice?

How Nonprofits Pay State Unemployment Insurance

Most employers are required by law to pay an unemployment insurance tax to their respective state. This payroll tax is known as the "SUTA tax," short for State Unemployment Tax Act.

When employers pay the SUTA tax, the money goes into the state's unemployment insurance program. When someone files for unemployment with the state after losing their job, the state will pay the eligible person unemployment benefits using money from the state unemployment fund.

When it comes to the SUTA tax, 501(c)(3) nonprofits have a unique choice. They can either:

• pay the SUTA tax just like any for-profit employer, or
• forego the SUTA tax and instead reimburse the state for any unemployment claims made by former employees.

(Federal Unemployment Tax Act (FUTA), 26 USCS § 3309 (2025).)

Some nonprofits are even exempt from this employer tax obligation entirely.

Nonprofits Exempt from Unemployment Insurance Obligations

Some nonprofits don't need to worry about paying the SUTA tax or reimbursing the state for unemployment claims. Many states exempt particular categories of 501(c)(3) nonprofits from unemployment laws. You should check your state's laws for specific exemptions. But typically, the following kinds of nonprofits don't have to pay the SUTA tax or self-insure:

• churches (the term "churches" includes temples, mosques, synagogues, and other houses of worship)
• associations or conventions of churches
• organizations operated primarily for religious purposes that are operated, supervised, or controlled by churches or an association of churches, and
• nonprofits with fewer than four employees who work 20 weeks per year.

In addition, some states exclude specific individuals from unemployment insurance coverage, including:

• ministers
• members of religious orders
• people performing work in a program that's designed to provide work for people who are physically or mentally impaired, and
• wards or inmates.

If you're one of the individuals who your state excludes from unemployment insurance coverage or if you work for a nonprofit that's excluded from unemployment laws, then you generally won't be able to collect unemployment benefits if you lose your job through no fault of your own. Some exempt nonprofits voluntarily provide these unemployment benefits for employees. But that scenario is rare.

2025 Supreme Court Ruling Expands Nonprofit Exemptions

Most states exempt nonprofits from paying unemployment compensation if the organization:

• primarily operates for religious purposes, and
• is operated, supervised, or controlled by a church or association of churches.

Wisconsin is one of those states. In 2016, the Wisconsin Labor and Industry Review Commission denied the state's unemployment exemption to the Catholic Charities Bureau, Inc. The Catholic Charities Bureau is a nonprofit that provides services to people with disabilities, among other services. The Bureau is a social ministry arm of the Roman Catholic Diocese of Superior, Wisconsin. The Commission argued that the Bureau had a secular purpose instead of a religious purpose and didn't qualify for the state's unemployment exemption.

The Bureau challenged the Commission's classification in court. In June 2025, the U.S. Supreme Court unanimously ruled that the lower court's interpretation of Wisconsin's law was religious discrimination. The Court said that the Wisconsin Supreme Court's scrutiny of the Bureau's theological practices—namely, how the Bureau carried out its charity work—created a denominational preference and differentiated between religions. Therefore, the denial of the exemption was unconstitutional and violated the First Amendment's Establishment Clause.

As a result of this Supreme Court ruling, the requirement that a nonprofit must have a primarily religious purpose to qualify for the unemployment exemption is now under scrutiny. Other church-associated nonprofits that don't have a primarily religious purpose—for example, hospitals and schools—can potentially avoid providing unemployment benefits to qualifying employees.

Many states have similar laws to Wisconsin for unemployment exemptions. The Supreme Court ruling could significantly alter the current landscape of unemployment law for many states and affect the benefits of a large swath of workers.

When Nonprofits Choose to Pay the SUTA Tax

501(c)(3) nonprofits, that aren't exempt, can pay state unemployment taxes for their employees like other for-profit businesses. When a nonprofit chooses to pay into the state's unemployment program, the tax works the same as it does for any other employer.

Who Pays the SUTA Tax?

Generally, employers—and not the employees—are responsible for paying the SUTA tax. Thus, the nonprofit would be responsible for paying this payroll tax to the state.

As of 2025, only three states require both employers and employees to pay the SUTA tax:

• Alaska
• New Jersey, and
• Pennsylvania.

However, if your nonprofit doesn't have employees in one of those states, then your business will be solely responsible for paying this tax.

How the SUTA Tax Rate Is Calculated for Nonprofits

The SUTA tax rate for each employer is unique, regardless of whether the employer is for-profit or not-for-profit. The SUTA tax rate is based on what's called an "experience rating." A nonprofit's experience rating is based primarily on the nonprofit's:

• total payroll (salary and wages), and
• unemployment claims history.

Employers with a high volume of claims pay higher unemployment taxes than those with a low volume of claims. In other words, if your nonprofit's turnover is low, then your nonprofit will be rewarded with a lower tax rate.

Typically, when a nonprofit starts out and registers to pay the SUTA tax as an employer, the state will assign that nonprofit a standard tax rate. The nonprofit's SUTA tax rate will then be adjusted annually based on its experience rating. A state's range for SUTA tax rates varies. You should check your state's rates for the current year.

How Nonprofits Pay the SUTA Tax

Nonprofit employers pay the SUTA tax to their state's employment department or agency. A nonprofit will first need to register as an employer with the appropriate department. For example, California employers register with the Employment Development Department, and Georgia employers register with the Department of Labor. You can usually register online and then file and pay the SUTA tax online.

Typically, your nonprofit will pay its unemployment insurance tax quarterly. To calculate how much tax is owed, your nonprofit will apply its SUTA tax rate to its employees' taxable wage base.

The "taxable wage base" is the amount of wages paid to an employee that is subject to the SUTA tax. An employee might make $80,000, but if your state's taxable wage base is only $15,000, then only $15,000 of the employee's $80,000 salary is taxed.

States differ widely in their taxable wage base. For instance, California has a low taxable wage base of $7,000 (as of 2025). Meanwhile, Washington's taxable wage base is $72,800—the highest in the country.

Let's look at an example. Suppose you have a California nonprofit with two employees. Each employee earns an annual salary of $50,000. But California's taxable wage base is $7,000, meaning only the first $7,000 of each employee's salary is taxed. California has assigned your nonprofit a SUTA tax rate of 3%. Your nonprofit would be responsible for $210 ($7,000 taxable wages x 0.03 SUTA tax rate) annually for each employee. This tax would be spread over four quarterly payments.

When Nonprofits Self-Insure and Reimburse for Unemployment Claims

A 501(c)(3) organization has the option of opting out of its state unemployment insurance program and choosing to self-insure. Instead of paying a set amount of unemployment tax to the state every year, regardless of how many of its employees file claims, the nonprofit reimburses the state only for unemployment claims the state actually pays out to its former employees.

When a nonprofit decides to reimburse the state for unemployment claims, it has three options to manage this potential expense:

• set aside the money and take care of the paperwork itself
• purchase private insurance, or
• join an unemployment trust.

Managing Unemployment Claims

As a reimbursing employer, an electing nonprofit is responsible for setting aside the funds needed to pay the state back for unemployment claims filed by former employees. In most cases, the state will require the nonprofit to deposit the money owed to the state in a specific account throughout the year.

However, your state might have different payment requirements. For example, North Carolina requires reimbursing nonprofits to maintain an escrow account with the state's Division of Employment Security with an account balance equal to 1% of the nonprofit's payroll. (N.C. Gen. Stat. §96-9.6 (2025).)

In addition to calculating the right amount of money to set aside, nonprofits that choose to reimburse their state for claims will need to make sure that the claims paid out are accurate. In some cases, the state might pay out claims that aren't actually owed. Your nonprofit will need to stay on top of these claims. If your nonprofit is overcharged, you can—and should—dispute the amount owed.

For many smaller nonprofits, it can be difficult to take on the task of reviewing and tracking unemployment claims. Some nonprofits instead choose to participate in an unemployment trust. Alternatively, your nonprofit can purchase private insurance to cover claims. Your nonprofit should do a cost-benefit analysis to determine which option is the best fit.

Unemployment Trusts

To mitigate the financial risks inherent in being self-insured, thousands of nonprofits have joined grantor trusts that pool money from many organizations to pay off future claims. Typically, nonprofits that utilize an unemployment trust deposit an agreed-upon amount into the trust throughout the year. The trust company will use those funds to pay the state on your nonprofit's behalf.

Unemployment trusts are an attractive option for nonprofits because the companies providing these trusts will usually:

• file unemployment paperwork
• handle the reimbursement payments
• temporarily cover claims that exceed your trust account
• track the status of claims
• represent your nonprofit at hearings to protest claims
• help former employees find new jobs, and
• provide professional customer support.

These trust companies can also provide other non-trust related services that can reduce unemployment claims, like human resources support.

You can check out Unemployment Services Trust (UST) and 501(c) Agencies Trust for more information on what unemployment trusts can offer.

Choosing to Pay the SUTA Tax vs. Self-Insuring

Nonprofits should consider whether they would be better off joining their state unemployment insurance program or becoming a reimbursable employer.

Advantages and Disadvantages of Paying the SUTA Tax

You have some benefits of paying the SUTA tax instead of electing to reimburse the state:

• It's easier to calculate and budget for the tax.
• If your nonprofit experiences high turnover, the tax provides a cap for how much you have to pay out.

On the other hand, paying the state unemployment tax has its downsides:

• Your nonprofit will likely pay more than its fair share of taxes.
• A season of mass layoffs can result in a higher tax rate in subsequent years.
• Your state might impose a surcharge on employers when its unemployment fund is below a certain threshold.

Advantages and Disadvantages of Reimbursement

Just as paying the SUTA tax has its pros and cons, choosing the reimbursement option also has its advantages and disadvantages.

Some benefits of reimbursing the state for claims paid include:

• Most nonprofits save money by choosing to reimburse the state rather than paying the state unemployment tax.
• Offering stable employment can save your nonprofit more money through reimbursement than with lower tax rates.
• Unlike the unemployment tax, the money you budget toward unemployment claims remains the property of your nonprofit until it's actually reimbursed to the state.

The downsides of reimbursement can include:

• Your nonprofit will have to put forth more administrative efforts to budget for potential claims and track any claims that have been filed.
• An unexpected surge in layoffs can result in a potentially financially devastating bill.

For more information on complying with IRS nonprofit regulations, see our book, Every Nonprofit's Tax Guide, by Stephen Fishman (Nolo). You can also find general guidance on running your nonprofit and answers to specific issues on the nonprofits section of our website.