Monday, February 18, 2019

Exempt Non Profit Organization to Federal Unemployment Tax

According to the IRS the federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. The federal unemployment program was enacted to encourage states to provide payment to workers who have lost their jobs. FUTA tax should be reported and paid separately from FICA and FITW. FUTA tax is paid only from an organization's own fund. Employees do not pay this tax or have it withheld from their pay.


An organization that is exempt from income tax under section 501(c)(3) of the Internal Revenue Code is also exempt from FUTA. This exemption cannot be waived. An organization that is not a section 501(c)(3) organization is not exempt from paying FUTA tax.


To exempt the Non Profit company from FUTA:

1.    Navigate to Setup > Payroll > Set Up Payroll

2.    Click on the Taxes tab

3.    Mark Exempt checkbox next to Federal Unemployment

4.    Change the effective date by clicking the calendar icon. When it is saved using the default date it will not save the changes

5.    Click Save


Update the Payroll Information:

1.    Navigate to Setup > Payroll > Update Payroll Information

2.    Click Agree > Click Commit Updates


For more current information, please visit IRS web site:




1.    Please contact Customer Support to mark FUTA as exempt at the back end.  Kindly inform Support if there are any payroll transactions created within the year where the exempt status is marked. Past transactions may need to be backed out to avoid the annual filing of the Federal form 940.

2.    If a notice is received from the IRS that about Federal form 940 is filed but not required, please forward the Tax Notice to Customer Support.


Disclaimer: This article is written with the undertaking that tax forms, rules and laws are constantly changing and the topic is updated at the publish date. 

We are not providing tax consulting and have no control over the websites provided in the article.  For the most current information, please contact your accountant/tax consultant, call the tax agency or visit the government official website.



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