Set up and manage tax exemptions

Employer tax exemptions

Commonly, qualified non-profits (ex. charitable, religious, and political organizations) are exempt from Federal unemployment tax (FUTA)—the IRS establishes this in section 501(c)(3) of the Internal Revenue Code

Employers, and some employees, may also be exempt from other employment taxes.

Liability thresholds—not yet liable for a tax

In some cases, your company may not yet be liable to pay a tax—for some agencies and taxes, agencies require that you cross a certain threshold before you pay the tax. 

In Gusto, if you're prompted for tax information the company is not yet liable for, we'll usually give you the option to tell us—if we don't, contact us from the Support section to get help with next steps.

Reimbursable employers

Certain employers, such as religious organizations and certain nonprofit employers, may have a choice to reimburse their state for the amount of unemployment claim benefits paid to their terminated employees (by the state). Employers have an account with the state and are charged dollar-for-dollar for benefits paid to their prior employees. 

• Most employers that have a reimbursable status will also need to set up their company type as Non-Profit in Gusto, and select Yes, we are a non-profit 501(c)(3) organization and are exempt from FUTA. 
• In addition to changing your company type, follow the steps below:
  1. Click the Taxes & Compliance section and select Tax Setup.
  2. Under each state's Tax Setup where you've approved reimbursable status, click the blue Manage Taxes link.
  3. Next to "SUI Reimburser," click the blue pen and select Yes, we can reimburse the state if an employee collects SUI benefits—we don’t have to pay SUI taxes quarterly.

Employee tax exemptions

Special exemptions may apply for Social Security, Medicare, Unemployment Insurance and other employment taxes for some employees. 

• Examples: Specific types of visas (J-1 and F-1), some business owners/corporate officers, pastors, etc.

If your employee tells you they're exempt from income tax withholding, have them complete a Form W-4, and indicate in their filing status they're “Exempt from withholding.”

Make sure to consult your accountant or a CPA—once you’ve verified an exemption, set it up in Gusto.

If you need help, contact us from the Support section of your account.

1. Click the Taxes & Compliance section and select Overview.
2. Select the Tax exemptions tile.
   • You'll be taken to a section that shows all company tax exemptions.
3. Click Add exemption on the right-hand side.
4. Read the overview and click Get started.
5. Let us know who's exempt from paying the tax:
   • My company is exempt from paying this tax
   • My employee is exempt from paying this tax—check out the reminders below about income tax exemptions.
6. Answer a few more questions about the exemption, like:
   • Does it apply to federal or state taxes
     • If a state, which one?
   • Why the company or person is exempt
   • Which specific tax the exemption is for
   • When the exemption goes into effect
     • Gusto can only apply changes up to 2 years back. To make changes further back, you’ll need to work with your CPA.
     • If you're backdating an exemption, it could impact company or employee-taxes—if this is the case, choose how you want Gusto to handle the fix:
       • Recalculate my taxes and debit or credit my account as needed.
       • Recalculate my taxes, but don’t debit my account—I’ll work directly with the agency.
7. Check the box confirming that you certify the information is accurate, and you’re aware of the potential penalties and interest if the company is not exempt.
8. Click Save exemption.

Once the exemption is set up, no wages will be reported for this tax, and we will not file for this tax with the corresponding agency. If you or your employee becomes liable for the tax in the future, it's the company’s responsibility to remove the exemption in Gusto. 

Income tax exemption reminders

If your employee tells you they're exempt from income tax withholding, have them complete a Form W-4, and indicate in their filing status they're “Exempt from withholding.”

• When an employee marks their Federal filing status as "exempt from withholding", or they elect "Do not withhold" for states, Gusto will not withhold the applicable tax from their wages, but we'll still report wages earned in Box 1, 16, and 17.

If the employee should not have wages reported on their W-2, and they should not pay the tax, set up the exemption formally (rather than the employee filling out a federal or state W-4).

View tax exemption details or change the effective date of an exemption.

1. Click the Taxes & Compliance section and select Overview.
2. Select the Tax exemptions tile.
   
   • You'll be taken to a page that shows all employee and employer exemptions—use the search or filter features to find the exemption.
3. On the tax that needs to be edited, click the three dots under the Actions column and select either:
   • View tax details—includes exemption history
   • Edit
4. If you're changing something, let us know what's changing:
   • This employee is no longer exempt from this tax
   • I need to change when this exemption goes into effect
5. Select the effective date for this change.
   • If you're backdating an exemption, it could impact company or employee-taxes—if this is the case, choose how you want Gusto to handle the fix:
     • Recalculate my taxes and debit or credit my account as needed.
     • Recalculate my taxes, but don’t debit my account—I’ll work directly with the agency.
6. Check the box confirming you’re aware of any implications.
7. Click Save changes.

You can only cancel tax exemptions with an upcoming effective date. 

1. Click the Taxes & Compliance section and select Overview.
2. Select the Tax exemptions tile.
   
   • You'll be taken to a section that shows all company tax exemptions.
3. On the tax that needs to be edited, click the three dots under the Actions column and select Cancel upcoming change.
4. In the pop-up, confirm you want to make this change by clicking Cancel upcoming change.

1. Click the Taxes & Compliance section and select Overview.
2. Select the Tax exemptions tile.
   
   • You'll be taken to a section that shows all company tax exemptions.
3. On the tax that needs to be edited, click the three dots under the Actions column and select Edit.
4. Select My company is no longer exempt from this tax in the dropdown menu.
5. Select the effective date for this change.
   • Changes to exemptions could impact company or employee-taxes—if this is the case, choose how you want Gusto to handle the fix:
     • Recalculate my taxes and debit or credit my account as needed.
     • Recalculate my taxes, but don’t debit my account—I’ll work directly with the agency.
6. Check the box confirming you’re aware of the implications.
7. Click Save changes.

1. Click the Taxes & Compliance section and select Overview.
2. Select the Tax exemptions tile.
   
   • You'll be taken to a section that shows all company tax exemptions.
3. On the tax that needs to be edited, click the three dots under the Actions column and select Reactive exemption.
4. Briefly explain the reason for the reactivation.
5. Select the effective date for this change.
   • If the date is in the past, our support team will need to assist with this change—click contact us to connect with the team.
6. Check the box confirming you’re aware of the implications.
7. Click Save changes.

Ministers may be given an official housing allowance that is excluded from taxable gross wages. Here's how to set up a housing allowance in Gusto:

1.  Add the housing allowance amount as a recurring reimbursement. Under "Reimbursement," make sure you choose Minister housing allowance to properly characterize it. 
   • To create end-of-year federal filings, ministers and clergy must also have taxable wages in addition to any housing allowances issued.
   • Make sure the allowance is an official housing allowance that is excluded from taxable gross wages. 
2. At the end of the year, any recurring reimbursements you've labeled as "Minister housing allowance" will automatically show up in box 14 of the W-2 form. 

Taxable housing allowance: Some states require withholding tax on pastor/minister housing allowance. At this time, this is unsupported in Gusto. 

Tax exemptions for ministers and clergy

Ministers may be exempt from certain taxes such as Social Security and Medicare—refer to the Topic 417 - Earnings for Clergy for more details on how to request these tax exemptions with the IRS.

Once you've confirmed that the minister is exempt from these taxes, set up the tax exemption in Gusto in the People section.

Apps that can help

Gusto connects to Aplos Accounting and can automatically track your payroll and tax payments. We also support the W-2 requirements and unique church payroll needs for pastor housing allowances and tax exemptions.

Gusto is required to collect and remit sales tax on your Gusto subscription in certain states. See the full list of required states and/or cities that Gusto is required to collect and remit sales tax is at the end of this section.

Filing address determines tax rate

Sales tax on services like Gusto’s varies by jurisdiction. If a jurisdiction considers any of our products as taxable, we’re required to collect and remit sales tax.

The company filing address stored in Gusto is used to determine the tax rate, and the tax charged will appear as a separate line item on your monthly invoice.

If you're a Gusto Partner, your clients may be charged sales tax on their Gusto subscription based on their filing address stored in Gusto.

Tax-exempt organizations

Some, but not all charitable, religious, scientific, or educational organizations may be exempt from sales tax.

If you're a Gusto customer and would like to apply for sales tax exemption, contact us.

Gusto partners with Avalara who will be validating tax exemption certifications on your behalf. Exemption validation typically takes 5-7 business days. If your application is approved before the end of the month, you will not be charged sales tax for the month, or months thereafter, so long as Gusto has valid proof of exemption as permitted by applicable law.

Sales tax jurisdictions—based on company filing address

• Alabama
• Arizona
• Colorado*
• Connecticut
• Hawaii
• Illinois*
  • Chicago
• Kentucky
• Maryland
• Massachusetts
• Minnesota
• New Mexico
• New York
• Ohio
• Pennsylvania
• Rhode Island
• South Dakota
• Tennessee
• Texas
• Utah
• Washington
• West Virginia
• District of Columbia (DC) 

*In applicable jurisdictions only.