Set up and manage tax exemptions

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:
  1. Sign in to Gusto.
  2. Go to Taxes & Compliance and click Tax Setup.
  3. Under each state’s Tax Setup, where you approved reimbursable status, click the blue Manage Taxes link.
  4. 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.

To add a tax exemption:

1. Sign in to Gusto.
2. Go to Taxes & Compliance.
3. Under Shortcuts, click Manage exemptions to view all company tax exemptions.
4. Click Add exemption on the right-hand side.
5. Read the overview and click Get started.
6. 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.
7. 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.
8. 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.
9. 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. 

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).

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

1. Sign in to Gusto.
2. Go to Taxes & Compliance.
3. Under Shortcuts, click Manage exemptions.
4. We’ll show you a page with all employee and employer exemptions. Use the search or filter features to find the exemption.
5. For the tax you want to edit, click the three dots under the Actions column. Select either:
   • View tax details — includes exemption history
   • Edit
6. 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
7. 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.
8. Check the box to confirm you understand any implications.
9. Click Save changes.

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

To cancel an upcoming tax exemption:

1. Sign in to Gusto.
2. Go to Taxes & Compliance.
3. Under Shortcuts, click Manage exemptions to view all company tax exemptions.
4. For the tax you want to edit, click the three dots under the Actions column and select Cancel upcoming change.
5. 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:

1. Sign in to Gusto.
2. Go to Taxes & Compliance.
3. Under Shortcuts, click Manage exemptions to view all company tax exemptions.
4. For the tax you want to edit, click the three dots under the Actions column and select Edit.
5. Select My company is no longer exempt from this tax in the dropdown menu.
6. 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.
7. Check the box to confirm you understand the implications.
8. Click Save changes.

Use this process to restart an exemption you previously removed or ended.

To reactivate a tax exemption:

1. Sign in to Gusto.
2. Go to Taxes & Compliance.
3. Under Shortcuts, click Manage exemptions to view all company tax exemptions.
4. For the tax you want to edit, click the three dots under the Actions column and select Reactivate exemption.
5. Briefly explain the reason for the reactivation.
6. 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.
7. Check the box to confirm you understand the implications.
8. 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)

Ministers may be given an official housing allowance that's 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," choose Minister housing allowance to characterize it properly. 
   • 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's 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 Form W-2. 

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.

Apps that can help

Gusto connects to Aplos Accounting, which 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.

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