Keeping a lid on unemployment taxes

Federal and state unemployment insurance can represent a significant cost of doing business. Fortunately, your management team can take proactive measures to help lower this cost, which varies depending on your work states, employment history and management practices. Here’s what you should know.

The basics

Unemployment insurance provides a temporary weekly benefit to qualified workers who lose their job through no fault of their own. Funding for the state and federal portions of the unemployment insurance system is drawn from payroll taxes imposed on employers under the State Unemployment Tax Act (SUTA) and the Federal Unemployment Tax Act (FUTA), respectively.

Under the unemployment insurance system, individual states have the authority to do the following:

  • Administer the unemployment insurance system.
  • Establish eligibility rules.
  • Set regular benefit amounts.
  • Pay benefits to eligible people.

Each state sets a tax rate schedule and a maximum amount of wages that is subject to taxation. Currently, the state wage base ranges from $7,000 in Arizona, California, Florida and Puerto Rico to $46,800 in Hawaii. The average tax rate also varies from state to state. So, just because your state’s wage base is higher than another state’s, it doesn’t necessarily mean that you’ll pay more in state unemployment taxes.

For example, although California’s unemployment tax wage base is only $7,000, the average employer in California contributed 4.33% of taxable wages to the state’s unemployment program in 2018. By contrast, the average employer contribution rate in Hawaii was only 1.01% of taxable wages in 2018.

Since 1983, the FUTA tax rate has been 6% of a maximum of $7,000 in covered wages per employee per year. Employers may be eligible for a maximum FUTA credit of 5.4%, resulting in a normal net FUTA rate of 0.6% — or $42 per year for each employee earning at least $7,000 annually.

Estimating your cost

In most states, established businesses will be assigned an “experience rating” from the state. That rating determines your state unemployment tax rate.

Your company’s experience rating and, therefore, its tax rate may be influenced by the number of former employees who’ve filed unemployment claims with the state, the number of your current employees and your company’s age. Typically, the more claims made against your company, the higher your premiums climb. Conversely, your company will pay state unemployment tax at a lower rate if your company’s involuntary turnover rate is lower.

Some states may allow employers to buy down their unemployment tax rate. Or businesses that recently acquired another may be able to use the acquired company’s unemployment tax rate or request the transfer of the previous company’s unemployment reserve fund balance.

In addition, you can follow these “best practices” to help lower turnover and, thus, lower unemployment taxes:

  1. Hire new staff conservatively.
  2. Consider using temporary workers, part-timers and contractors during peaks, if possible.
  3. Assess candidates with standardized testing before hiring them.
  4. Conduct ongoing staff training to enable employees to succeed.

If you must terminate an employee, consider giving him or her a severance payment as well as offering outplacement benefits. Severance pay may reduce or delay the start of unemployment insurance benefits. Plus, effective outplacement services may hasten the end of unemployment insurance benefits, because the claimant has found a new job.

We can help

Contact an Elliott Davis advisor to see how we can help.