Set up and manage tax exemptions (for admins)
This article is for admins who need to set up or manage tax exemptions in Gusto.
A company or employee is tax-exempt when the law does not require them to pay a specific tax.
When you add a tax exemption in Gusto, we will not deduct that tax or report it on your filings. Before you make any changes in Gusto, consult a CPA or other tax professional to confirm if you or your employee qualifies for the exemption.
If you added your accountant in Gusto, chat with them and have them set up the exemption.
If you do not have an accountant admin in Gusto, we recommend adding one or using our Partner Directory to find one.
Some tax exemptions, like income tax exemptions, require help from our team to set up. To contact us, sign in to your Gusto account and click the help icon 
in the top-right corner of the page.
Tax exemptions fall into two main categories: employer exemptions and employee exemptions.
Employer tax exemptions
Qualified non-profits — such as charitable, religious, and political organizations — do not pay Federal unemployment tax (FUTA). The Internal Revenue Service (IRS) establishes this exemption in section 501(c)(3) of the Internal Revenue Code.
Employers and some employees may also qualify for exemptions from other employment taxes.
Liability thresholds — not yet liable for a tax
In some cases, your company may not yet need to pay a tax. Some agencies require you to reach a certain threshold before you pay the tax.
When we ask for information about a specific tax, you can usually select an option that tells us your company is not yet liable for that tax. If we do not give you this option, contact us to get help with next steps. To contact us, sign in to your Gusto account and click the help icon in the top-right corner of the page.
Reimbursable employers
Some employers, such as religious organizations and certain nonprofit employers, can choose to reimburse their state for unemployment benefits the state pays to their former employees. These employers have an account with the state, and the state charges them dollar-for-dollar for benefits their former employees receive.
Most employers with reimbursable status 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 these steps:
Go to Taxes & Compliance and click Tax Setup.
Under each state’s Tax Setup, where you approved reimbursable status, click the blue Manage Taxes link.
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
Some employees qualify for special exemptions from Social Security, Medicare, Unemployment Insurance, and other employment taxes.
Examples: Employees with specific visa types (J-1 and F-1), some business owners and corporate officers, pastors, and others.
Note: If an employee has the “Owner’s Draw” compensation type in Gusto, this is a tax-free transfer of money from the company to an owner. You do not pay taxes on this transfer, and you do not need to set up exemptions. Click here for more information on paying owners in Gusto.
If your employee tells you they qualify for exemption from income tax withholding, have them complete a Form W-4, and indicate in their filing status that they’re “Exempt from withholding.”
Consult your accountant or a CPA to verify the exemption before you set it up in Gusto.
In your web browser
To add a tax exemption:
Go to Taxes & Compliance.
Under Quick links, click Manage exemptions to view all company tax exemptions.
Click Add exemption on the right-hand side.
Read the overview and click Get started.
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.
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
We can only apply changes up to 2 years back. To make changes further back, you’ll need to work with your CPA.
If you backdate an exemption, it may affect company or employee taxes. If this happens, choose how you want us 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.
Check the box to confirm you certify the information is accurate and you understand the potential penalties and interest if the company is not exempt.
Click Save exemption.
After you set up the exemption, we will not report wages for this tax and will not file for this tax with the agency. If you or your employee becomes liable for the tax in the future, you must remove this exemption in Gusto.
In the Gusto mobile app
To add an exemption:
Open the Gusto mobile app and sign in.
At the bottom of the screen, tap More.
Select Taxes & compliance.
Scroll down to Quick links and select Manage exemptions.
Tap Add exemption.
Select Get started.
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.
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
We can only apply changes up to 2 years back. To make changes further back, you’ll need to work with your CPA.
If you backdate an exemption, it may affect company or employee taxes. If this happens, choose how you want us 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.
Check the box to confirm you certify the information is accurate and you understand the potential penalties and interest if the company is not exempt.
Tap Save exemption.
After you set up the exemption, we will not report wages for this tax and will not file for this tax with the agency. If you or your employee becomes liable for the tax in the future, you must remove this 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 that they’re “exempt from withholding.”
When an employee marks their Federal filing status as “exempt from withholding,” or they select “Do not withhold” for states, we will not withhold the tax from their wages, but we’ll still report wages earned in Boxes 1, 16, and 17.
If the employee should not pay the tax and their W-2 should not show wages for this tax, set up the exemption formally (rather than have the employee fill out a federal or state W-4).
In your web browser
To view tax exemption details or change the effective date of an exemption:
Go to Taxes & Compliance.
Under Quick links, click Manage exemptions.
We’ll show you a page with all employee and employer exemptions. Use the search or filter features to find the exemption.
For the tax you want to edit, click the three dots under the Actions column. Select either:
View tax details — includes exemption history
Edit
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
Select the effective date for this change.
If you backdate an exemption, it may affect company or employee taxes. If this happens, choose how you want us 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.
Check the box to confirm you understand any implications.
Click Save changes.
In the Gusto mobile app
To view tax exemption details or change the effective date of an exemption:
Open the Gusto mobile app and sign in.
At the bottom of the screen, tap More.
Select Taxes & compliance.
Scroll down to Quick links and select Manage exemptions.
Scroll down to the tax exemption you want to manage. Tap on the three dots to the right of the exemption.
To see more info, tap View Tax Details. To make changes, tap Edit.
You can only cancel tax exemptions with an upcoming effective date.
To cancel an upcoming tax exemption:
Go to Taxes & Compliance.
Under Quick links, click Manage exemptions to view all company tax exemptions.
For the tax you want to edit, click the three dots under the Actions column and select Cancel upcoming change.
In the pop-up, click Cancel upcoming change to confirm.
Use this process to end an exemption when your company or employee is no longer exempt from a tax.
To remove a tax exemption:
Go to Taxes & Compliance.
Under Quick links, click Manage exemptions to view all company tax exemptions.
For the tax you want to edit, click the three dots under the Actions column and select Edit.
Select My company is no longer exempt from this tax in the dropdown menu.
Select the effective date for this change.
Changes to exemptions may affect company or employee taxes. If this happens, choose how you want us 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.
Check the box to confirm you understand the implications.
Click Save changes.
Use this process to restart an exemption you previously removed or ended.
To reactivate a tax exemption:
Go to Taxes & Compliance.
Under Quick links, click Manage exemptions to view all company tax exemptions.
For the tax you want to edit, click the three dots under the Actions column and select Reactivate exemption.
Briefly explain the reason for the reactivation.
Select the effective date for this change.
If the date is in the past, our Care team will need to help with this change. Click Contact us to connect with the team.
Changes to exemptions may affect company or employee taxes. If this happens, choose how you want us 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.
Check the box to confirm you understand the implications.
Click Save changes.
If you’re an S-Corp owner with no other employees in certain states, you can choose whether or not to pay some payroll taxes. When you pay these taxes, you may qualify for benefits if you become unemployed or get sick.
These taxes include:
Unemployment insurance (UI)
Disability insurance (SDI)
Paid family leave (PFML)
Important: You may lose some tax exemptions when you hire additional employees as an S-Corp owner. Confirm your tax obligations with the tax authorities when you hire employees in a new state.
Use this overview to see which states require S-Corp owners to pay certain taxes and which states let you choose. For detailed steps and requirements, see the state-specific sections.
States where you’re automatically covered:
California: (UI - no opt-out available)
Hawaii: (UI - family-owned corporations can opt out)
South Carolina: (UI - can opt out)
Wisconsin: (UI - small corporations can opt out)
States where you’re automatically exempt
Alaska: (UI - must opt in to be covered)
Washington: (UI - must opt in to be covered)
States with multiple tax types
California: UI (covered) + SDI (can opt out if sole/spouse shareholder)
Hawaii: UI (covered, family exception) + TDI (no opt out)
Washington: UI (exempt), Workers’ Comp (exempt), PFML (covered*), WA Cares (covered*)
*Depending on employee vs. self-employed status
Get full details and next steps in the state-specific sections.
California SDI: Effective first day of calendar quarter when filed
South Carolina UI: File by January 15 for the current year
Wisconsin UI: File by March 31 of the election year
Alaska UI: Binding for the remainder of the filing year plus two additional years
Unemployment Insurance (UI)
Default: Alaska automatically exempts S-corp owners (Executive Officers) from unemployment insurance. You must voluntarily opt in if you want coverage.
How to opt in
Complete Page 5 of the registration form for “Voluntary Election of Coverage.”
Send the completed form to the Alaska Department of Labor and Workforce Development.
Remove the tax exemption in Gusto by following the instructions in the Remove a tax exemption section.
Important rules
You must cover all executive officers if you choose coverage.
Your election is binding for the rest of the calendar year you file in, plus two additional years.
Form
Unemployment Insurance (UI)
Default: California automatically covers S-corp officers with UI. You cannot opt out of UI coverage.
State Disability Insurance (SDI)
Default: California covers you with State Disability Insurance (which includes Paid Family Leave).
You can opt out if:
You’re the sole shareholder of the corporation, OR
The only other shareholder is your spouse.
How to opt out of SDI
Get an employer payroll tax account number (required before filing).
File Form DE 459 (Sole Shareholder/Corporate Officer Exclusion Statement) with the Employment Development Department (EDD).
Important: Your exclusion takes effect on the first day of the calendar quarter when you file the statement.
Online filing steps:
Go to the EDD e-Services for Business website and log in*.
Find the section for “Sole Shareholder/Corporate Officer Exclusion Statement”.
Complete the online form.
Submit electronically.
Add a company tax exemption in Gusto by following the instructions in the Add a tax exemption section.
*Paper filing option: You can also mail a paper version of Form DE 459 to the address on the form.
Unemployment Insurance (UI)
Default: Hawaii automatically covers S-corp owners.
You can opt out if: Your business is a “family-owned corporation.” This means a corporation with no more than two family members who each own at least 50% of the shares.
How to opt out of UI
Log in to the Hawaii Department of Labor and Industrial Relations.
Click on the Forms section.
Find Form UC-336 “Election by Family-Owned Corporation to be Excluded from Coverage”.
Complete the online form.
Submit electronically.
Add a company tax exemption in Gusto by following the instructions in the Add a tax exemption section.
Temporary Disability Insurance (TDI)
Default: Hawaii covers S-corp owners who are employees. S-corp owners who are employees cannot opt out.
Unemployment Insurance (UI)
Default: South Carolina automatically covers corporate officers unless the corporation elects to opt out.
How to opt out
Download Form UCE 1060 (Application for Exemption of Business Entity Owners from Unemployment Insurance Coverage) from SC DEW Employer Tax Services.
Complete the form by January 15 to make it effective for that calendar year.
Important: If you complete this form after January 15, you’ll need to pay this tax for the current tax year. You can exempt yourself for the next tax year.
Send the completed and signed form to the address listed on the form.
Add a company tax exemption in Gusto by following the instructions in the Add a tax exemption section.
Unemployment Insurance (UI)
Default: Washington automatically exempts S-corp owners from unemployment insurance. You must opt in if you want coverage.
How to opt in
Read about voluntary coverage from the state.
Submit a Voluntary Election Form to the Employment Security Department (follow mailing instructions on form).
Register as an employer (on your own), or let us register for you.
Remove the company tax exemption in Gusto by following the instructions in the Remove a tax exemption section.
Workers’ Compensation (L&I)
Default: Washington generally exempts corporate officers from mandatory coverage if they’re a director and shareholder. However, you can elect to have coverage.
How to opt in
Elect coverage through the Department of Labor & Industries (L&I) — find more information on the L&I website.
Register as an employer (on your own), or let us register for you.
If you decide NOT to pay: Add a company tax exemption in Gusto by following the instructions in the Add a tax exemption section.
Paid Family and Medical Leave (PFML)
Default: Washington generally requires S-corp owners to participate if they receive wages. However, if the S-corp is an LLC for state law purposes, the members may count as self-employed and can opt in.
How to opt in
Elect coverage through the Paid Family and Medical Leave website.
Register as an employer on your own, or let us register for you.
If you decide NOT to pay: Add a company tax exemption in Gusto by following the instructions in the Add a tax exemption section.
WA Cares Fund (Long-Term Care)
Default: Washington treats S-corp owners similarly to PFML. If you count as an employee, Washington automatically covers you. If you count as self-employed (like an LLC member), you can opt in.
How to opt in
Elect coverage through the WA Cares Fund website.
Register as an employer on your own, or let us register for you.
If you decide NOT to pay: Add a company tax exemption in Gusto by following the instructions in the Add a tax exemption section.
Unemployment Insurance (UI)
Default: Wisconsin automatically covers S-corp owners.
You can opt out if: Your business is a small corporation with an annual taxable payroll of less than $500,000, and you want to exclude principal officers who have a substantial ownership interest (25% or more).
How to opt out
File by March 31 of the election year.
File Form UCT-7937 “Election to Exclude All Principal Officers” with the Department of Workforce Development.
Add a company tax exemption in Gusto by following the instructions in the Add a tax exemption section.
Website and form
Website: Wisconsin DWD
Form: UCT-7937
General questions
Q: What happens if I hire employees after making these elections?
A: You may lose some tax exemptions when you hire additional employees as an S-Corp owner. Confirm your tax obligations with the tax authorities when you hire employees in a new state.
Q: How do I update my tax-exempt settings in Gusto?
A: Follow the instructions in this article for adding or removing company tax exemptions.
State-specific questions
Q: In California, can all S-Corp officers opt out of SDI?
A: No. You can only opt out if you are the sole shareholder OR your spouse is the only other shareholder.
Q: What defines a “family-owned corporation” in Hawaii?
A: A corporation with no more than two family members who each own at least 50% of the shares
Q: What if I miss the January 15 deadline in South Carolina?
A: You’ll need to pay the tax for the current year, but you can exempt yourself for the next tax year.
Q: How long does an Alaska UI election last?
A: The election is binding for the rest of the calendar year you file in, plus two additional years.
Q: What’s considered a “small corporation” in Wisconsin?
A: A corporation with an annual taxable payroll of less than $500,000
Follow these steps to set up or change your tax exemption.
Determine your state’s rules from the state-specific sections.
Complete the required state paperwork if you want to change your coverage.
Update your Gusto tax-exempt settings by adding or removing tax exemptions as needed.
Keep records of all forms you file with state agencies.
Talk to tax authorities when you hire employees in new states.
Before you set up exemptions, talk with tax advisor, and get more specific details about how to account for minister and clergy housing allowances in Gusto.
We’re required to collect and remit sales tax on your Gusto subscription in certain states. See the full list of states and cities at the end of this section.
Filing address determines tax rate
Sales tax on services like Gusto varies by jurisdiction. If a jurisdiction considers any of our products taxable, we’re required to collect and remit sales tax.
We use your company’s filing address in Gusto to determine the tax rate. The tax will show as a separate line item on your monthly invoice.
If you’re a Gusto Partner, we may charge your clients sales tax on their Gusto subscription based on their filing address in Gusto.
Tax-exempt organizations
Some charitable, religious, scientific, or educational organizations qualify for sales tax exemptions.
If you’re a Gusto customer who wants to apply for a sales tax exemption, contact us. To contact us, sign in to your Gusto account and click the help icon in the top-right corner of the page.
We partner with Avalara, which validates tax exemption certifications on your behalf. Validation typically takes 5 - 7 business days. If Avalara approves your application before the end of the month, you will not pay sales tax for that month or any month, as long as we have valid proof of exemption under the law.
Sales tax jurisdictions — based on the company's 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