1 Combining Administrative Records and Business Registers to Estimate Quarterly Employment in Nonprofit Organizations in the USA Martin H. David Professor,

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Combining Administrative Records and Business Registers to Estimate Quarterly Employment in Nonprofit

Organizations in the USA

Martin H. DavidProfessor, Emeritus, Univ. of Wisconsin – Madison

Associate Scholar, Urban Institute

ICES3, 21 June 2007

Views expressed here do not reflect policies and estimates of the Department of Labor or the Bureau of Labor Statistics.

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Acknowledgements

• Bureau of Labor Statistics – provided access to the QCEW via its research

enclave.– Rick Clayton, David Talan, Amy Knaup, and Merissa

Piazza advised and commented on earlier reports.• Center For Nonprofits, Urban Institute

– provided its IRS databases and funding. – Tom Pollak and Linda Lampkin provided technical

information about IRS information returns. – Jen Auer and Kendall Golladay assisted and

provided useful checking on inconsistencies in the IRS_QCEW match.

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“Public Sector Failures” (Niskanen) Employment in charitable organizations

What failures?• Estimates

– badly understated– not timely– not published

• Flawed Information returns

• Censor employment

Which agencies?Statistical agencies

• Census• IRS/SOI • BLS

IRS/TEGO OMB/OIRA

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Defining private nonprofit organizations

• Constitutionally exempt – Religious congregations

• Exempt under income tax law §501(c)– Charitable Organizations (501(c)(3))

–e.g. Education, Hospitals, Social Services, Research, Arts, Advocacy

– Other exempt (not 501(c)(3))–Governments –Membership orgs & Assoc.–Credit Unions, Coops, Mutual Ins. etc.

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Why study Nonprofits?• SIZE: Nonprofit employment 8-13 million 2003q1• GROWTH: larger than private sector (Salamon 2005)• NEED: Timely national and area data used to

understand availability of charitable services• Example: disaster response to Katrina• How many employees could respond?

• INCENTIVES: For-profit / nonprofit entities differ.– Performance of nonprofits

• a public issue because of subsidy from tax system.

– Productivity of nonprofit workers • needed to understand outcomes of nonprofit activity

• Commingling nonprofit with for-profit obfuscates understanding of both sectors.

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Published employment for nonprofits

• Economic Census– Limited coverage of NAICS sectors

• 61 Education– Excludes many educational institutions

• 62 Health & Social services• 71 Arts, sports & entertainment• 813 Religious, grantmaking, civic, prof. orgs.

– 5-year estimates, • publication in 2005 for 2002 data

– Not classified into 501(c)(3) and others– Small enterprises imputed from IRS data

• employment data censored

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Table 1. Nonprofit employment reported in Economic Census 2002

A C D E G HExempt All Ratio: A/C Exempt All Ratio: E/G

61 120 431 0.28 12 50 0.2462 7,980 15,048 0.53 136 703 0.1971 1,363 1,847 0.74 49 109 0.45

813 936 936 1.00 11 11 1.00Total exc. 813 9,463 17,326 197 862 inc. 813 10,400 18,262 208 874

Naics classifi-cation

Employment Establishments

All estimates in 1,000’s

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Unpublished employment for nonprofits

Elicited on IRS Form 990• Strengths

• filed annually by larger nonprofits• comprehensive data• Classifications

– Exemption: differentiate 501(c)(3), others– Industry classified by NTEE

• Weaknesses– Incomplete

• No employment for smaller organizations• 20% non-response for large organizations

– Unavailable– Not timely (due to fiscal years, filing calendar)

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Employment reports on Form 941

• Limitations – No indicator for nonprofits– Applies to employers with more than $2500 of

liability for payroll and income tax withholding• Value

– captures most employers that withhold income taxes or FICA

– Quarterly report• Q1 reference period identical to Form 990• captures employment missing from Form 990

– 20% of 990 filers fail to report employment – late filers provide no timely information

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Proposed estimates from matched data

Exempt identified by:• IRS Form

990/990-EZ

and• IRS Registry of

exempt entities– includes defunct

orgs.

Employment from:• IRS/Form 941

– quarterly since 2005– larger payroll

employers

• Form W-2 (low payroll employers)

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Can we match nonprofits to Forms 941?

• Feasible procedure established for match to BLS/QCEW– A similar procedure applies to Form 941– Match entails two merges

• A. Link Form 990/990-EZ to Form 941 by EIN• B. For EIN’s that are identified as exempt

(Registry) and have no Form 990– Link Registry to Form 941by EIN

• Matching errors require– deleting mismatched EIN’s (3.5% in QCEW)– weighting for matches that fail because of

error in recording EIN (1.2% in QCEW)

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OutlineFocus is on operating charities, 501(c)(3)

1 Matching records to improve estimates

2 Details of QCEW matching process

3 “Enhanced” employment estimates

4 Implications, conclusions

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Estimates from matched data

Exempt identified by:• IRS Form

990/990-EZ

and• IRS Registry of

exempt entities– includes defunct

orgs.

Employment from:• BLS/QCEW

– UC liable employers– filed quarterly

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Gain/Loss from matching

• QCEW-Form 990 matched by EIN– increases measured nonprofit employment

• allows imputation for nonreporting Form 990 filers• some reported 990 employees not eligible for UC

– classified by both NAICS and NTEE– measures extent of multi-establishment

employers• Unmatched Form 990 include

– Employers not liable for UC– Employers who are censored in QCEW – Employees who are truncated– Nonemployers

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Nonprofit employment & organizations by class of exemption, 2003 (000’s)

IRC subsection:

501(c)( )

Employment

(wtd.)

Organizations

All 13,300 343

(c)(3) plus* 11,700 277

Remainder 1,600 66

* Includes some organizations with subsection NA

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Coverage of 501(c)(3) match

• For US, est. 43% match rate (98% employers)• For US, est. 34% no wage and no employees

– Match covers 57% of all filing employers

• For all matches,– NTEE, NAICS industry classifications– Allocation of employment to worksites– Comparable legal names

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Matching errors (ME)• Can ME be ignored?

• Only if no selectivity in observed matches• Only if no interest in multiple variable regression.

• Match failures (false negatives) lead to incomplete coverage and bias.– Example: Distribution of employment by size

is flawed in enterprise level statistics• 2 smaller employers are tallied when interstate

employer can not be matched across states Okolie (2004).

– Problem exists even though aggregate employment is correct.

• Regression inconsistent (Scheuren-Winkler 1997)

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Outline

1 Matching records to improve estimates

2 Details of QCEW matching

3 “Enhanced” employment estimates

4 Implications, conclusions

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IRS public information on nonprofits(to be matched to QCEW)

• Form 990/990-EZ• Coverage: Most entities with revenues > $25,000• NCCS Census available from filings for 1999-2003

– Over 95% match the Registry (by EIN)

• Extract of Registry• Coverage: All entities operating under IRS approval• Used to match QCEW in this study, when no Form

990 is available (<10% of 501c3)

• Registry a “gold standard” for EIN• less than 4/10,000 registry ein’s are invalid.

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Nonprofit liability for UC(induces QCEW records)

• 1/3 nonprofits employ no one.• Exclusions from UC

– 30 states exclude employers of 1-3 employees.

• Not available for matching

– Many employees are excluded:• Part-time workers (35 states)• Students and interns (most states).

QCEW employment understates actual

employment in nonprofit organizations

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Early warnings of match errors

• 2% QCEW records lack ein’s in 2000 • Substantial numbers of QCEW match to IRS

Registry and not to IRS information returns (990/990-EZ)

• Some matches link tiny organizations to behemoths whose payroll is far larger than organization expenses.

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Removing False Positive Matches

• Test relationship between organization expenses (Form 990) and payroll (QCEW)

• Reject match where 0.2 expense < payroll• Delinked 3% of matched organizations

• Registry matches: Scan Legal name and industry class

• Reject where NAICS sector = 52, 8x• Reclassify where exempt entity is linked to

business association, labor union• Delinked 5% of Registry matches

• 3.3% organizations delinked

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Weighting to offset false negative matches

• A few QCEW EIN’s are invalid• 1.9% in 2000q1, 1.4% in 2003q1• States range from 0.4% to 5.8% in 2001q1• Rates decline with increasing number of

employees• Fit probit to level of employees by state, s• Calculated nonresponse weight, controlled to

state totals by year

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Outline

1 Matching records to improve estimates

2 Details of QCEW matching process

3 “Enhanced” employment estimates

4 Implications, conclusions

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T2 QCEW matches to Forms 990, 501(c)(3) organizations, 2003q1*

Included states Excluded Total

Matched? states

Yes No

A Form 990-EZ 4 42 7 53

proportion of Forms 990 0.08 0.79 0.13 1.00

B Form 990 79 95 27 201

proportion of Forms 990 0.39 0.47 0.13 1.00

C Subtotal NCCS Census 83 137 34 254

proportion of Forms 990 0.33 0.54 0.13 1.00

D Registry-QCEW matches 23 -- -- 23

E TOTAL 106 137 34 277

proportion of total 0.38 0.50 0.12 1.00

F Estimated matches** 13 21 0

G UNIVERSE 119 158 0 277

proportion of universe 0.43 0.57 1.00

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T3. QCEW and Form 990 Employment: 2003, 501(c)(3), in 000's

      QCEW emp. IRS employment

Source Match? Orgs. Raw Wtd. Raw Imputed Augmented

990, inc.              

  Yes 79 6,780 6,930 6,831 7,463 7,463

  No 95   1,005 1,005 1,005

990-EZ, inc.      

  Yes 4 10 10 NA 10 10

  No 42    

Subtotal 220 6,790 6,940 7,836 8,478 8,478

Registry Yes 23 1,724 1,777 NA NA 1,777

Available states 243 8,514 8,717 10,255

990, exc.   27     1,485 1,485 1,485

990-EZ, exc.   7         NA

Total   277 NA NA 9,321 9,963 11,740

Circles show where QCEW finds employment not reported on Form 990.

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T3. QCEW and Form 990 Employment: 2003, 501(c)(3), in 000's

      QCEW emp. IRS employment

Source Match? Orgs. Raw Wtd. Raw Imputed Augmented

990, inc.              

  Yes 79 6,780 6,930 6,831 7,463 7,463

  No 95   1,005 1,005 1,005

990-EZ, inc.      

  Yes 4 10 10 NA 10 10

  No 42    

Subtotal 220 6,790 6,940 7,836 8,478 8,478

Registry Yes 23 1,724 1,777 NA NA 1,777

Available states 243 8,514 8,717 10,255

990, exc.   27     1,485 1,485 1,485

990-EZ, exc.   7         NA

Total   277 NA NA 9,321 9,963 11,740

Circles show where Form 990 reveals employment not in QCEW (lower bound estimates).

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Nonprofits by class of exemption, 2003(000’s)

IRC subsection:

501(c)( )

Employment

(wtd.)

Organizations

All 13,300 343

(c)(3) plus 11,700 277

Remainder 1,600 66

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Outline

1 Matching records to improve estimates

2 Details of QCEW matching process

3 “Enhanced” employment estimates

4 Implications, conclusions

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What have we learned?

• Nonprofit employment is large• 13.3m in all• 11.7m in 501(c)(3)

• Prior estimates need to be refined– Matching errors can not be ignored– Form 990 estimates need imputation– Registry matches improve coverage

• Part of nonprofit employment is not measured anywhere

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Where do we go from here? IRS/TEGO

• IRS/TEGO can and should– resolve false positive matches– require wage-paying organizations to report

employees– revise Form 990-EZ to include counts of

employees

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Where do we go from here? IRS/SOI

A. Publish nonprofit employment numbers.– IRS measurement is more complete than

BLS, • 1.0+ million employees not in QCEW

– Imputing employment for nonreporting organizations is possible

• More then 600,000 employees can be found

B. Estimate nonprofit employment with Form 941 match for best coverage.

– captures some Form 990-EZ employment– imputation with low MSE.

C. Employment on match to W-2 needs study.

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Where do we go from here? BLS

• Can make publication of nonprofit employment part of the OEUS program– This would be efficient

• past estimates match selected states at haphazard intervals using different methods.

– Yearly estimates, with a 9-month lag• indicator that can be benchmarked to more

universal coverage in IRS Form 990 & 941

• Should support continuing research on the IRS-QCEW match to produce BED estimates

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Comments?

Contact: [email protected]

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Matches of QCEW that use EIN

• Nonprofit employment: matched to IRS Registry • Salamon 2005, Gronbjerg 2005, Michigan

nonprofit research 2004

• Enterprise statistics on employment dynamics • Okolie 2004

• Quality of business registers: match to Census records.

• Spletzer and Elvery 2005, 2006

• Match errors a problem in all of these studies

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Matching errors (continued)

• Cross-linked records (False positive matches) vitiate classical regression estimators.

• Scheuren and Winkler 1997

• Absurd relationships are suggested by inclusion of false positives in linked data.

• 2 donor files: A. correct ID; B. false ID

– Match produces links to 2 distinct records in donee file – Error!

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IRS regulates nonprofit sector

• Exemption from corporate income tax– automatic for religious congregations– otherwise, approved by IRS under IRC 501(c)

– contributions to c(3) tax deductible– c(4) membership organizations– other subsections include many entities

• Rules– Governance; no distribution of excess revenue– Annual information reports to public required.

• IRS information about exempt entities disclosable!

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Findings: Probability of invalid ein

• State-by-state

– Dominant pattern• probability decreases as employees

increase to 10, then nearly constant• negative time trend

– A few states • probability not monotonic decreasing with

less than 11 employees–May have positive trend

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Weighting for failed matches

• Use probability of invalid ein, θis, to calculate weights for matched data

– Sum θis by state, giving θ.s .

• ks =(Actual sum invalid ein) / θ.s

– wt i s =1/(1 – θis ks) assuming η≈0

• Calculate weighted sum, by state

– Establishments

– Employment

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Borrowing strength from QCEW matches

• Previous slide demonstrated how we can extrapolate to excluded states using match rates in included states.

• Now we investigate consistency of QCEW and Form 990 reports.

– Consistency provides a basis for estimating the universe of employers.

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Consistency of employment, wage reports

• Internal to Form 990– Compensation > 0 ↔ employees > 0

• FN no employees, positive wages• FP employees, no wages

• Comparing Form 990 to QCEW– Employees on March 12 should agree

• FN QCEW employees, Form 990 none• FP QCEW none, Form 990 employees

• Consistency allows us to estimate proportion of organizations with no employees (not in universe of study)

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FN FP TN TP Total

FN 19 1 20

FP * 1 1

TN 1 * 1

TP 2 76 77

Total 20 2 2 77 100

Consistency of employee reporting: Form 990 - QCEWC

onsi

stency

of

com

pensa

tion &

em

plo

yees,

Form

990

Note: 95% of Form 990 FP are QCEW TPOnly 2/5 of Form 990 TN are QCEW TN.* less than 0.5%

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Fig. 4 Concentration of employment in NAICS sectors

0

5

10

15

20

25

NTEE 15

NA

ICS

sec

tors

Low 90+ % of emp.

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Employees, counted by employer

• BLS

– Current employment statistics (CES)• monthly for 160,000 organizations• focus: private, nonfarm, non-household

– QCEW• quarterly “census” of UC employers

–available 9 months after quarter–analyzed for employment dynamics–no reliable exempt classifier

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T5 Employment by NTEE major sectors, 2003 q1, 501c3

QCEW Forms 990

NTEE 15 Orgs Wtd. Imputed Augmented

A 29 188 261 290

B not B4 48 1,158 644 1,381

B4 1 757 1,184 1,271

C,D 10 67 78 83

E not E2 33 1,289 1,439 1,713

E2 3 2,971 3,636 3,876

I 5 48 63 65

J,K,L 21 274 400 429

M 4 7 8 9

N,O 26 142 141 185

P 39 1,272 1,693 1,761

Q 5 21 41 42

R - W 33 282 298 359

X 17 128 70 161

Y 1 13 5 15

Z 2 99 1 100

Total 277 8,717 9,963 11,740

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I mputation &augmentation, 2003q1, 501(c)(3)Matched Form 990's

I mputation Augmen-NTEE 15 rate* NTEE 15 tation rate* *E2 0.043 Q 0.026Q 0.055 P 0.040B4 0.086 I 0.044A 0.107 E2 0.066E not E2 0.117 C,D 0.067X 0.118 J ,K,L 0.072P 0.127 B4 0.073C,D 0.132 A 0.111J ,K,L 0.139 M 0.126R - W 0.154 E not E2 0.190Z 0.164 R - W 0.206B not B4 0.173 N,O 0.309N,O 0.177 B not B4 1.144I 0.178 X 1.295M 0.197 Y 1.745Y 0.906 Z 78.110All 0.093 All 0.210

*Observed for Form 990 matched to QCEW.

**Increase over imputed total.

Bold: consistency of rank in 1/3 or 3/3 of NTEE.

I talics: no industry class is assigned to Z.