Unemployment Benefits: What Your Leadership and Staff May Not Know 

Government-paid unemployment compensation provides workers who have lost their job, through no fault of their own, with monetary payments until they find a new job or their benefits expire. Most employers are required to pay federal and state unemployment taxes—but most ministries are exempt. This can be a benefit to ministries, but an undue burden for employees.  

Ministries typically are federally exempt…but there’s a catch

Generally, ministries are not required to pay federal unemployment taxes because they are exempt from the Federal Unemployment Tax Act (FUTA) under section 501(c)(3) of the Internal Revenue Code.  The instructions for Form 940, the form used to report and pay FUTA taxes, include the following direction: “Religious, educational, scientific, charitable, and other organizations described in section 501(c)(3) and exempt from tax under section 501(a) are not subject to FUTA tax and do not have to file Form 940.”

While the tax exemption is a cost-saving benefit to ministries, the employees of non-participating ministries will be ineligible to collect unemployment benefits if they lose their position. Both ministries and employees may not be aware that compensation is unavailable.

Note: Ministries that operate a for-profit school or day care may be able, or may be required by state law, to pay unemployment taxes or provide unemployment benefits in some states.

Different States, Different Requirements

States also collect unemployment insurance taxes under state unemployment tax acts (SUTA), and tax money collected through FUTA is used to oversee how each state manages its collected funds. FUTA taxes also can be used to supplement a state’s funds during shifts in unemployment numbers.

State unemployment tax requirements vary by state. Each state determines who is responsible to remit unemployment taxes and who is eligible to receive unemployment compensation. A few states require ministries to pay state unemployment taxes, but most ministries can choose an exemption similar to FUTA. Contact your state’s department of workforce development for SUTA requirements before your ministry decides how to approach the issue.

Texas and New York’s policies are good examples of how each state’s unemployment tax policies differ:

• Texas considers an individual “in the employ of a church or organization operated primarily for religious purposes and that is operated, supervised, controlled, or principally supported by a church or a convention or association of churches” to be excluded from the definition of employment.  Therefore, it appears churches in Texas are not required to pay state unemployment taxes.

• New York considers only some ministry-worker positions to be excluded under state unemployment tax requirements.  

Ministry leaders are strongly encouraged to consult with a local attorney to ensure the organization is compliant with its state’s unemployment tax policy. 

Ministries Can Choose, but Tell Your Employees

Ministries may choose to offer unemployment benefits to their excluded employees. For employees to receive unemployment compensation, the ministry must develop a policy and method for willingly paying benefits.  To voluntarily pay for benefits, a ministry has three options:

1. Purchase a supplemental unemployment insurance policy through a private insurer.

2. Reserve funds for severance packages.

3. Reimburse the state for unemployment benefits (required by some states).

Consider the financial, tax, and legal consequences of each option by talking to a tax professional. Ministries that don’t offer unemployment benefits should clearly communicate its position and how it impacts potential and current employees. Some states also require employers to notify employees in writing that the benefit is not available to them.

Help for Ministries

Tax and employment questions can be especially cumbersome for ministries since some laws contain provisions specific to religious organizations. Brotherhood Mutual offers several free resources in the areas of workers’ compensation benefits, employment practices, and more. Ministry leaders are encouraged to seek the advice of a local attorney or tax professional to ensure compliance with federal and state laws.

Legal Q&A resources

• Q: How can our ministry identify independent contractors for tax purposes?

• Q: Could our ministry owe taxes or workers' compensation benefits in connection with independent contractors?

From our Safety Library

• Working Together Guidebook

• Good Employment Practices Protect Ministries

• Avoid Church Employment Liability

• The Risk of Leadership: 5 Problem Areas That Expose Personal Assets

Government resources

• From the IRS: Tax Guide for Churches and Religious Organizations

• From the U.S. Department of Labor: Unemployment Insurance Tax Topic

Appeared in Brotherhood Mutual’s Safety News, April 24, 2019
Created March 26, 2019