As a result of the COVID-19 pandemic, an unprecedented number of employees have filed for unemployment benefits. Fortunately, nonprofits can elect to self-insure their unemployment programs and not have to pay quarterly taxes. Churches and most ministries are exempt from paying unemployment taxes altogether.
In Arizona, if you operate a 501(c)(3) nonprofit that employs four or more people for some part of a day in each of 20 different weeks in a calendar year, you are required to pay state unemployment taxes. Arizona nonprofits can elect to do this in one of two ways:
- Pay state unemployment insurance taxes; or
- Reimburse the state only for benefits paid to former employees.
For 2021, Arizona’s state unemployment insurance (SUI) tax rates range from .08% to 20.6%, significantly up from 2020 rates. Under Governor Ducey’s Executive Order 2020-11, employers are not charged for COVID-19-related unemployment insurance benefits retroactive to March 10, 2020.
Under Section 3309 of the Federal Unemployment Tax Act, 501(c)(3) organizations may elect to reimburse the state only for unemployment claims the state has paid to a nonprofit’s former employees. Since the national average for nonprofits is more than double the tax amount for every dollar paid in claims, most nonprofits save money by becoming reimbursing employers.
Nonprofits that choose to become reimbursing employers can outsource the administrative duties to a nonprofit unemployment trust, which will handle payments owed to the state and manage the claims process.
In general, churches and ministries with 501(c)(3) status are not required to pay unemployment taxes. However, if the church has a for-profit operation such as a school or daycare facility, it may be required to pay these taxes in some states. Churches may also voluntarily opt to pay for unemployment insurance for their employees, either through a private insurer, by reserving funds, or by reimbursing the state for benefits.
When a church, ministry, or other nonprofit organization in Arizona needs advice about the liability of its Directors, Board Members, or other volunteers, Provident Law’s church and nonprofit attorneys are here to help. We recognize how essential these organizations are to society, and we provide broad transactional and general counsel services to keep them running smoothly. Contact us to learn more.