What happens when a 501(c)(3) school acts as a common paymaster for a related organization that is not a 501(c)(3)?  Might they owe FUTA taxes?



Saltwater Christian College (SCC) is a private college exempt under Internal Revenue Code section 501(c)(3) and 170(b)(1)(A)(ii).  They are required to file Form 990 annually.

As part of their ongoing “Revenue Enhancement Opportunity” projects, a few years ago, SCC set up a related 501(c)(4) that performs lobbying and other activities on matters the might affect Christian colleges in their state and throughout the U.S.  This organization, “SCC Action,” receives contribution and membership income.  This 501(c)(4) now has two employees that are paid through SCC as a “common paymaster.”

The Controller at SCC calls us to ask whether they need to remit FUTA taxes and file Form 940 on the two SCC Action employees.

We tell them that the answer is yes – pursuant to a TEGE FSL Issue Snapshot dated 1/25/18 and entitled “Common Paymaster.”  Also, there have been problems with 501(c)(3) organizations electronically remitting the FUTA taxes for related organizations in situations like this.  The IRS has stated that they are aware of the issue and are working on it.  In the meantime, the 501(c)(4) could remit the FUTA taxes for their two employees.



From TEGE Issue Snapshot “Common Paymaster” (1/25/18):

In an instance, wherein a 501(c)(3) organization is the common-law employer of, and payer of wages to, its own employees as well as the sole payer of wages to a related organization exempt under 501(c)(4) (or other 501(c)code section), only the services of the (c)(4) employees are subject to FUTA; however, the (c)(3), as the common paymaster, is responsible for the reporting of the FUTA. The wages paid to the (c)(3) employees continue to be exempt from FUTA but the (c)(3) is required to file Form 940 and pay the FUTA tax for the (c)(4) employees.

The 940 filing requirement and FUTA tax liability transfers to the (c)(4) organization if the (c)(3) organization fails to report the FUTA wages disbursed to the (c)(4) employees.

If the (c)(3) files and pays FUTA on the (c)(4) employees’ wages and paid the SUTA tax, then the (c)(3) takes the SUTA credit on Form 940. However, if the (c)(4) files Form 940 and pays the FUTA tax on their employees, the (c)(4) cannot take the SUTA credit and is subject to the full FUTA tax rate. This is because the credit is attributable to SUTA payments made by the (c)(3) organization. Because the (c)(3) and the (c)(4) are separate entities, they are considered separate employers for FUTA rules and the SUTA credit is not transferable. Likewise, if the (c)(3) files and pays FUTA on the (c)(4) employees’ wages and the SUTA tax was paid by the (c)(4) organization, the (c)(3) cannot take the SUTA credit and is subject to the full FUTA tax.



  • 501(c)(3) organizations generally are not required to pay FUTA taxes on their employees (under I.R.C. Section 3306(c)(8)).
  • The “common paymaster” rules are complex and should be closely reviewed/analyzed by organizations who believe they are operating within these rules.
  • Currently, there is a “systemic issue” at the IRS on allowing FUTA tax deposits by 501(c)(3) organizations – the Service is working on it.
  • The TEGE Issue Snapshot, “Common Paymaster” may be found at:


Specific questions? Email Dave Moja

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.

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