We recently received a question about state unemployment tax, and I want to pass on Senior Tax Associate Carla Medrano’s answer in the interest of all readers. Here is the question:

“Are religious non-profits in the state of Texas exempt from state unemployment tax?  My experience is that non-profits [501(c)(3)s] are not exempt from state unemployment tax even if they are religious organizations.  An example might be a school that is a 501(c)(3), based on a particular denomination, but legally not part of a particular church or owned by a denomination.  (Churches are exempt from state unemployment in the state of Texas, correct?)”

Nonprofit organizations with a 501(c)(3) tax exemption are subject to state unemployment tax, unless they are a church or religious organization. In the example above, the school would be subject to paying state unemployment tax, but the church would not. From the Texas Workforce Commission:

The Texas Unemployment Compensation Act (TUCA) requires liable Texas employers – including sole proprietorships, partnerships, corporations, and other entities registered with the Secretary of State – to pay UI tax. Employers become liable if they:

• Pay at least $1,500 in wages in any one calendar quarter during the current or preceding calendar year, or
• Employ at least one worker for part of a day or more each week for 20 weeks during a year, or
• Acquires or otherwise receives, through any means, all or part of the organization, trade, business, or workforce of a subject employer, or
• Are a 501(c)(3) nonprofit organization (excluding churches and religious organizations) and have at least four employees for part of a day or more each week for 20 weeks, or
• Elect to become a subject employer, or
• Have Texas employees and are subject to the Federal Unemployment Tax Act (FUTA), or
• Are a state political subdivision or instrumentality, or
• Pay $1,000 or more wages one calendar quarter for domestic service, or
• Employs three (3) employees for 20 weeks in a calendar year or pays $6,250.00 in cash wages in a calendar quarter, or
• Employ a seasonal worker on a truck farm, orchard or vineyard, or
• Employ a migrant or a seasonal worker(s) who works for a farmer, ranch operator, or labor agent who employs migrant worker(s).

If there is a private school associated with your church that is exempt under 501(c)(3) of the Internal Revenue Code,  then Revenue Procedure 75-50 (Rev. Proc.) requires that the school have a racially nondiscriminatory policy as to its students.

This Rev. Proc. further requires that the school make an annual nondiscrimination statement in a local newspaper and/or radio.  The statement should be made in a forum that potential students and their parents would use; that is you should post your nondiscrimination statement in a place that you’d expect your potential students to frequent.

The Rev. Proc. gives specific wording, type and size of font for an acceptable notice.  Additionally, the Rev. Proc. also provides the record keeping requirements related to racial composition of the student body, faculty and administrative staff for each academic year, brochures, catalogues and advertising dealing with student admissions, programs, scholarships and other financial assistance awarded on a racially nondiscriminatory basis.

Failure to follow this guidance will result in loss of tax exempt status for the school.

A recent article by the ECFA (Evangelical Council for Financial Accountability®), noted that churches will get a free pass regarding the revocation of 275,000 nonprofit organizations.

Reporting on the recent revocation of tax status of 275,000 nonprofit organizations, the New York Times reported the action shrinks the nation’s nonprofit sector by roughly 17 percent, to about 1.3 million charities, trade associations, membership groups and labor unions. The IRS took action against charities that failed to file required paperwork for three consecutive years. Note: Churches are not required to file Form 990 and, therefore, churches were not included in the 275,000 organizations relating to this revocation of tax-exempt status.

Some organizations that identify themselves as churches may appear on the Automatic Revocation of Exemption List (Auto-Revocation List) because IRS records do not identify them as churches, but rather as some other type of organization that has an annual filing requirement. Because these organizations failed to file annual returns or notices for three consecutive years, they appear on the Auto-Revocation List.
While it shrunk the number of nonprofits on the IRS’ list by 17 percent, it certainly did not reduce the number of nonprofits by 17 percent since most of the 275,000 organizations were apparently non-existent for many years. The IRS indicated about one-quarter of the 275,000 received tax exemptions before 1980 and many simply stopped operating without telling the IRS.

Until a change in federal law in 2006, only organizations other than churches with annual revenue of $25,000 or more — roughly one-third of the 1.6 million nonprofit groups — were required to file.

To see if a ministry is an ECFA member, click here.
To see if a non-member is listed as a 501(c)(3), click here.