Unemployment Laws and Nonprofits

Date Posted: 11/27/2017
Last Updated: 5/30/2024

Unemployment insurance is an important part of the social safety net that helps workers who have been laid off or terminated without cause to transition into new jobs by providing them with limited, temporary financial assistance. The Division of Employment Security at the NC Department of Commerce manages North Carolina’s unemployment system.

Here is some basic information about how the state’s unemployment system affects nonprofits.

As employers, what are nonprofits options for paying unemployment insurance?

For-profit businesses with paid employees are generally required to pay state unemployment insurance (UI) tax. Many nonprofit employers are treated differently from for-profit businesses for purposes of state unemployment taxes. Generally, 501(c)(3) nonprofits have three options for how they handle UI payments:

  1. Nonprofits with fewer than four employees who work 20 weeks during the year are exempt from paying into the unemployment system. Unless these nonprofits voluntarily pay UI taxes, their employees are not eligible to receive unemployment benefits if they are laid off.
  2. Most charitable nonprofits pay state unemployment tax like businesses. These nonprofits pay a quarterly tax that is a percentage of their overall payroll. Tax rates are determined by “experience ratings,” which are based on employers’ histories of unemployment claims. When the state’s UI trust fund is below $1 billion, employers that pay UI taxes are also charged a 20% surcharge.
  3. Some 501(c)(3) nonprofits elect to reimburse the state for their unemployment claims rather than pay unemployment tax. These organizations are not required to pay a quarterly UI tax and cannot be assessed a 20% surcharge based on the amount of money in the state’s UI reserve fund. However, nonprofits that elect to reimburse for UI must maintain an amount equal to 1% of their payroll in an escrow account with DES and must make dollar-for-dollar payments to the state UI fund if they terminate employees who are eligible for unemployment benefits.

How have recent changes to NC’s unemployment system affected nonprofits?

In January of 2013, then-Governor McCrory signed a bill into law (H.B. 4) making major changes to North Carolina’s unemployment insurance (UI) system. The state owed about $2.5 billion in debt to the federal government that was borrowed to pay state unemployment benefits. The 2013 law included cuts in benefits for the unemployed and small unemployment tax increases for some businesses and nonprofits. The state now has a surplus of more than $3 billion in its UI fund, so lawmakers have been able to suspend a 20% surcharge for employers that pay state unemployment insurance (UI) taxes. 

A recent report from the Urban Institute to a legislative committee highlights the impact of the 2013 law on unemployment benefits received by North Carolinians. The report found that the average duration of unemployment benefits was reduced from 16.2 week in 2012 to 9.3 weeks in 2016, and the average weekly benefits were reduced from $298 to $247 over the same period. As a result of these changes, North Carolina’s unemployment benefits are now among the lowest in the country.

These changes in unemployment benefits may have two significant impacts for many nonprofits:

  1. For nonprofits that elect to reimburse for unemployment expenses instead of paying unemployment insurance (UI) tax (see above for more details), UI costs are likely to be lower. In fact, it’s possible that this option may now make financial sense for more nonprofits. For more information about whether this option works best for your organization, we encourage you to contact First Nonprofit Companies, a partner of the Center that provides unemployment insurance options for many nonprofits.
  2. Because unemployed North Carolinians are receiving fewer benefits while they seek new jobs, they may be more reliant on nonprofits to help provide for their basic needs, such as food, housing, job assistance, and child care. This may create new, unfunded burdens on many nonprofits.