Can You Get a Grip on Unemployment Taxes?

Most manufacturers, distributors and retailers spend a considerable amount on salaries and bonuses, which means that federal and state unemployment insurance can represent a substantial cost of doing business. Fortunately, although there may be variations depending on the states where you have employees as well as your employment history and management practices, your management team can take proactive measures to help lower this cost. Here’s what you should know.

How does unemployment insurance work?

Unemployment insurance offers 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).

Individual states have the authority to do the following under the unemployment insurance system:

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

Each state establishes a tax rate schedule and a maximum amount of taxable wages. 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 don’t assume that because your state’s wage base is lower than another state’s, you’re going to pay less in state unemployment taxes.

For example, although California’s unemployment tax wage base is only $7,000, the average employer there paid 4.33% of taxable wages to the state’s unemployment program in 2018 ($303.10 per employee, maximum). By contrast, the average employer contribution rate in Hawaii was only 1.01% of taxable wages in 2018, which would cost less than $303 for any employee making less than $30,000.

The FUTA tax rate has remained unchanged at 6% of a maximum of $7,000 in covered wages per employee per year since 1983. 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.

Other cost factors

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

The experience rating of your company, and therefore its tax rate, may be influenced by the number of former employees who have 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, if your company’s involuntary turnover rate is low, your company will pay state unemployment tax at a lower rate.

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

You can also 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.

Analyzing payroll costs

With the help of our CPAs, you can perform a cost-analysis study that will enable you to see via black-and-white projections whether increasing your payroll is worth the investment. If it isn’t financially attractive to add permanent staff, consider other options.

There are multiple factors that affect your company’s state unemployment tax rate, Contact Weaver to discuss what proactive steps you can take that will help lower this cost.

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