Wednesday, December 26, 2018

Hey Fletch … I recently hired a PEO to handle most of our HR services. On the first two payrolls they issued, they collected federal and state unemployment tax. Historically, we had never paid that. After some research, it seems as though our church is exempt from federal unemployment tax and has the option of paying state unemployment tax.

I realize we may “mitigate” the risk of an unemployment claim by paying the tax regularly, but it does not seem financially sound. In our state, the maximum claim is $390 a week for 26 weeks, while 3.9% of our total payroll is over $26,000 a year.

We have the savings to pay a maximum $10,140 claim should we be requested to reimburse one. I would much rather do that instead of paying 2.5 times that a year in taxes if it is not required.

Am I missing something? I want to make sure we play by the rules, but in this case it seems like a large unnecessary expense for us. Your response would be helpful.

DRF—There is a good summary of a Professional Employment Organization (PEO) in this article:

A PEO is a firm that provides a service under which an employer can outsource employee management tasks, such as employee benefits, payroll and workers’ compensation, recruiting, risk/safety management, and training and development. The PEO does this by hiring a client company’s employees, thus becoming their employer of record for tax purposes and insurance purposes. This practice is known as co-employment. As of 2010, there were more than 700 PEOs operating in the United States, covering 2-3 million workers.

I haven’t talked to anyone recently who has used a PEO. There are some interesting issues for churches. You have found one of them with unemployment insurance.

Another issue is how the PEO would handle ministerial housing allowances. If the PEO is your agent, then they could pay the allowances. If the PEO is the employer of all of your staff, it would be interesting to see how a non-church would pay housing allowance that only churches can pay. Can they adequately account for this since they are not a church?

Response—After some further discussion with the PEO, I realized since they are not a 501c3 they are required to pay the unemployment tax. It no longer seems as if there’s a choice for us. Now, I need to determine if the benefit of hiring them still outweighs the increased cost.