Workers Compensation and Unemployment Guidance for NYS Charities

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There is a lot of confusion about the need for workers compensation, federal and New York State unemployment by charities and other nonprofits. Here is a summary of the rules.

I will start with workers compensation because the penalties for lapses in coverage can be extreme.

You don’t have to cover board members or other volunteers with workers compensation, but remember volunteers are individuals who aren’t paid salary, stipends or perks that have monetary value.

Board members who receive compensation from a charitable organization are also exempt as long as they perform no manual labor.

Paid clergy and members of religious orders are exempt from mandatory coverage but can elect coverage

Similarly, paid individuals teaching for a religious, charitable or educational institution are also exempt from mandatory coverage.

Paid individuals who perform non-manual services for religious, charitable or educational organization are also exempt from mandatory coverage, but manual labor includes everything from filing and playing musical instruments to shoveling snow and mowing lawns.

Individuals receiving rehabilitation in a sheltered workshop and those in similar circumstances, who receive aid from a charity and perform work in return for such aid, are exempt from coverage.

Federal Unemployment, charities exempt under Internal Revenue Code section 501(c)(3) are automatically exempt from federal unemployment. They are subject to New York State Unemployment but they may elect to opt out of payment of quarterly unemployment tax and alternatively reimburse the state for unemployment claims that are made. The registration is made on form NYS-100N.

In addition, certain nonprofit employees are exempt from New York State unemployment including:

ordained clergy members
members of religious orders
lay members of religious orders engaged in religious functions
caretakers for religious organizations
sheltered workshop, rehabilitation, and youth service program participants, but they all must meet certain requirements.
Call us or check New York State Department of Labor website for more information

Be sure you are clear on the rules before you exclude individuals from coverage. Penalties can be extremely high.

When is Real Property Rental an Unrelated Business Activity?

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There are many special rules and exceptions for real estate rental.

First, if the rental furthers your charitable purpose, such as with affordable, emergency, or transitional housing, there is generally no unrelated business activity.

If your rental activity is unrelated, but there is no debt related to the property, rental income will be treated like dividends and interest (taxable to social clubs but exempt for most other nonprofits).

If there are loans related to the property, there are complex calculations of how much is taxable.

One of the twists in these rules applies when there is rental of personal property, like furnishings, with the real estate. This won’t affect you if 10% or less of the income is related to personal property. However, if personal property represents more than 10% but no more than 50% of the income, that percentage will be considered unrelated, and if more than 50% of the rent relates to personal property, all of the rent will be a unrelated business income.

If you operate a parking lot, that income is taxable but if you lease your parking lot to an operator it will qualify as a real property rental.

If services are provided as part of the rental, it can make the rental subject to unrelated business income treatment.

Be aware that the sale of real estate that is loan financed results in Unrelated Business Income.

A couple more exceptions you should be aware of include loan financed property that is purchased with an intention to use it as part of your program but which isn’t currently being used in that way, and property that is donated but which has a mortgage or other loan. In both of these cases there can be exceptions to unrelated business income treatment.

Finally, don’t forget your get out of jail free card. An activity must be “regularly carried on” to be treated as an unrelated business activity. A limited or occasional rental of property won’t be unrelated business income regardless of whether personal property is included, or whether there are outstanding loans against the property.