South Carolina Unemployment Tax Exemption: Who Qualifies and Penalties

A South Carolina unemployment tax exemption is available for a narrow set of employment relationships spelled out in S.C. Code § 41-27-260: work for churches and religious organizations, agricultural and domestic labor below specific size thresholds, certain family employment, students working for their school, and insurance agents paid entirely by commission.¹ Exempt status is not automatic. You have to establish it with the Department of Employment and Workforce (DEW), and misclassifying a worker exposes you to back taxes, penalties, and interest.

Who Qualifies for an Exemption

The exemptions target specific employment relationships, not entire industries. Each has its own test.

Religious Organizations and Ministers

Work performed directly for a church, a convention or association of churches, or an organization operated primarily for religious purposes and supported by a church is not covered employment.² Ordained, commissioned, or licensed ministers performing ministerial duties are exempt, as are members of religious orders carrying out duties required by the order. A church-affiliated daycare or school qualifies as long as the organization is operated primarily for religious purposes and is managed or principally supported by a church.

Agricultural Labor

Agricultural labor is exempt unless the employer crosses one of two size thresholds. Coverage kicks in if the employer either paid $20,000 or more in cash wages for agricultural labor in any calendar quarter of the current or preceding year, or employed 10 or more agricultural workers for some portion of a day in each of 20 different calendar weeks during the current or preceding year.² Stay below both, and no state unemployment tax is owed on that labor. These thresholds mirror the federal FUTA rules.³

Agricultural students have a separate exemption. Work performed by students enrolled and regularly attending classes for at least five months during the year at a secondary school, accredited college, university, or technical school is excluded even if the agricultural employer exceeds the thresholds above.²

Domestic Service

Domestic service in a private home, local college club, or local chapter of a college fraternity or sorority is exempt as long as the employer paid less than $1,000 in cash wages for such service in every calendar quarter of both the current and preceding calendar year. Once cash wages reach $1,000 in any quarter, unemployment tax applies to domestic workers.²

Family Employment

Two family-based exemptions apply. Work performed by a person employed by their son, daughter, or spouse is not covered employment. Work performed by a child under 18 employed by a parent is also exempt.¹ The child-by-parent exemption ends at 18, not 21. Once the child turns 18, wages paid by a parent are subject to unemployment tax like any other employment relationship.

Student Workers

Work performed by a student for the school, college, or university where the student is enrolled and regularly attending classes is excluded.¹ Work-study positions and campus jobs at the institution where the worker is enrolled fall into this category.

Insurance Agents on Straight Commission

An insurance agent or solicitor whose entire compensation comes from commissions is exempt.¹ Any salary, hourly pay, or non-commission compensation defeats the exemption.

Nonprofits Don’t Get an Exemption, But They Get a Choice

Secular 501(c)(3) nonprofits are commonly assumed to be exempt. They’re not. Unlike religious organizations, which are categorically excluded, secular nonprofits are generally subject to unemployment coverage in South Carolina. What they get instead is a choice in how they pay.

Under S.C. Code § 41-31-620, a qualifying nonprofit can elect to make payments in lieu of contributions, commonly called the reimbursable method. Instead of paying a quarterly tax rate, the organization reimburses the state for the actual cost of unemployment benefits paid to its former employees.⁴ The alternative is the standard contributory method, where the nonprofit pays a quarterly tax rate like any other employer.

The reimbursable election runs at least two calendar years. A newly subject nonprofit must file written notice within 30 days of the date the state determines it is subject to the law. An existing contributory nonprofit switches by filing notice at least 30 days before the start of the calendar year. A reimbursable employer pays the full amount of regular benefits and half of any extended benefits paid to former employees, including benefits later found to have been paid in error, until the state recovers the overpayment from the claimant.

The reimbursable method suits organizations with low turnover, because they pay only when a former employee actually claims. For staff-heavy nonprofits with frequent turnover, the contributory rate can be cheaper. One claim can run into thousands of dollars, so the choice deserves real analysis before the 30-day window closes.

Federal Unemployment Tax Is a Separate Question

A South Carolina exemption does not automatically exempt you from federal unemployment tax (FUTA). FUTA imposes a 6% tax on the first $7,000 of each employee’s annual wages, with a credit of up to 5.4% for employers who pay state unemployment taxes in full and on time.⁵ Being exempt from state tax means you don’t earn the credit.

Two categories line up cleanly at both levels. FUTA explicitly excludes service performed for religious, charitable, and educational organizations described in Section 501(c)(3), and it uses the same $20,000-per-quarter and 10-employees-in-20-weeks tests for agricultural labor as South Carolina.³ For other state exemptions, review IRS Publication 15 and the Form 940 instructions to determine whether FUTA still applies.

How to Get Your Exempt Status Confirmed

DEW does not know your workers are exempt until you tell them. You establish status by filing the UCE-151 Employer Status Report, available on the DEW website.⁶ The Nature of Business section is where you align your organization with a specific statutory exemption, including precise dates showing when your business first met or fell below the relevant employment or wage thresholds. Submit the form and supporting documents through the South Carolina Unemployment Insurance Tax System (SUITS).⁷

Every employer needs a Federal Employer Identification Number and a description of its legal structure. The rest depends on which exemption you’re claiming:

Nonprofits: a copy of the IRS determination letter confirming 501(c)(3) status. If you no longer have the original, letters issued since January 2014 can be downloaded through the IRS Tax Exempt Organization Search tool, and older letters can be requested using Form 4506-B.⁸
Agricultural and domestic employers: payroll records showing quarterly cash wages, separated clearly from other compensation, since only cash remuneration counts toward the $20,000 and $1,000 thresholds.
Religious organizations: documentation establishing the entity’s relationship to a church, convention, or association of churches.

DEW reviews the materials and issues a determination letter. A granted exemption confirms you are not liable for state unemployment taxes on the exempt workers. A denial explains the legal basis and your appeal rights.

If DEW Denies the Exemption

You have 30 days from the date of the determination to file an appeal.⁹ Appeals are filed using Form APP-100 (Request for Appeal). An appeal tribunal reviews the determination and can affirm, modify, or reverse it. Miss the 30-day window and you generally forfeit the right to challenge the determination, so mark the calendar the day the letter arrives.

What Getting It Wrong Costs

Records that prove you stayed below a dollar or headcount threshold are your primary defense in an audit. Retain payroll records, wage reports, tax deposit receipts, and DEW determination letters for at least four years after filing the fourth-quarter return for the year.¹⁰

An employer who should be paying unemployment tax but fails to do so faces compounding consequences. DEW charges a penalty of 10% of contributions due for late filing, with a minimum of $25 and a maximum of $1,000. Interest accrues at 1% per month on any unpaid balance until it is paid in full. Employers who fail to file required wage reports, or who carry an unpaid balance with an active state tax lien, get reassigned to Tax Class 20, which carries the maximum rate of 5.46%.¹¹ That penalty rate stays in place until the employer comes into compliance. Incorrectly claiming an exemption and ignoring the resulting liability can turn a modest tax obligation into a serious one.

1
South Carolina Legislature. South Carolina Code 41-27-260 – Exempted Employment
2
South Carolina Legislature. South Carolina Code of Laws Title 41 Chapter 27
3
Office of the Law Revision Counsel. 26 USC 3306
4
South Carolina Legislature. South Carolina Code of Laws Title 41 Chapter 31
5
Office of the Law Revision Counsel. 26 USC 3301
6
SC Department of Employment and Workforce. UI Tax Forms
7
SC Department of Employment and Workforce. SUITS
8
Internal Revenue Service. EO Operational Requirements: Obtaining Copies of Exemption Determination Letter from IRS
9
SC Department of Employment and Workforce. The Appeals Process
10
Internal Revenue Service. Employment Tax Recordkeeping
11
SC Department of Employment and Workforce. Installment Payment Agreement