State unemployment compensation programs provide unemployed workers with compensation during a period of involuntary unemployment. Each state maintains an account in the Federal Unemployment Trust Fund in which monies are payable upon demand and may only be withdrawn to pay unemployment benefits to eligible workers.
States annually adjust employers’ state unemployment tax rates based on each employer’s specific employment history -- this is commonly referred to as an “experience rating.” An employer’s experience rating is calculated based on the amount of benefits paid to former employees and charged to the employer’s unemployment account. Many states include all benefits charged against each employer in determining an experience rating, while other states use a current three- or five-year rolling total. Employers with significant layoffs will see that calculated into a higher experience rate and, as a result, pay higher unemployment taxes.
Mergers, acquisitions, spin-offs, or any other reorganization of a company can also have a significant effect on an employer’s experience rate. A successor company may be required to inherit either all or a portion of the experience rate attributable to a transferred business – these rules vary from state to state. With careful review and upfront planning, companies may be able to reduce their state unemployment tax liabilities. Companies that would benefit the most from state unemployment tax planning include companies with recent ownership changes or a history of significant head-count fluctuations.
Many states have begun to send, or are in the process of sending, state tax rate notices to employers that will be effective Jan. 1, 2018. Unemployment tax rate notices are typically distributed to employers from October through February. There are several opportunities when a company can reduce its state unemployment tax liabilities on an annual basis. A limited window of opportunity is available to explore these options – reviewing the rate for calculation errors, the establishment of joint accounts, and the payment of voluntary contributions -- to reduce an employer’s unemployment tax liabilities for future years.
Employers have a limited time frame in which to protest an assigned state unemployment insurance (SUI) tax rate. Protests are generally based on whether the rate was properly calculated and assigned based on the employer’s past history, and utilizing current SUI rate tables. Calculation errors can also arise from past transactions, including the proper transfer of taxable wage base and successor experience rate transfers. Other areas for protest include the incorrect application of payments and/or credits and simple calculation errors by the state(s). Also, benefit claims charged in error may increase an employer’s experience rate and result in higher overall SUI costs to that employer.
Employers should be aware of the benefits paid to former employees that are charged to their unemployment tax accounts, as states differ in the way they allocate and charge these benefits. For example, a few states will charge all benefits paid to a former employee to the most recent employer, while the majority of states will charge a share of the benefits to a former employer based on the proportion of wages they paid to the former employee during a certain time period.
Certain states allow for a joint account of multi-entity organizations. In those states, an organization can reduce its unemployment tax liability by combining the SUI experience of two or more related employers to obtain a single tax rate based on the combined experience. Rules differ among the states with respect to the timing of the election as well as for the duration that employers must maintain the joint account. It is up to the employer, and not the state agency, to determine which related companies will be part of the joint account, thereby providing leeway for the employers to select the most advantageous and cost-effective combination(s) to include in the joint account.
Certain states will allow an employer to make voluntary contributions to the state unemployment tax fund. The purpose of a voluntary contribution is to increase the balance created for an employer, which lowers an employer’s experience rate. This lower rate can result in a savings to the employer greater than the amount of the voluntary contribution.
It is important to note that SUI tax rate calculations can be very complex. A lower overall SUI tax rate, whether it is from a rate protest, joint account or voluntary contribution can not only significantly reduce an employer’s payroll cost in the current year, but can also have a positive multi-year effect.
Contact Eddie Adkins
Partner, Washington National Tax Office
Human Capital Services Technical Practice Leader
+1 202 521 1565
Director, Human Capital Services
+1 949 878 3350
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