Unemployment affects all Business Tax Rates

You count yourself among the fortunate – as a business owner, you have been flexible, maintained your staff without layoffs, but expansion has been on the back burner.  In some cases, your planning and flexibility, along with careful attention to your market may even mean that you business has grown a bit while riding the economic rollercoaster of the last two years.

Future Rate Increases

Recent state announcements have indicated that because of the large amount of unemployment claims that basic tax rates for state unemployment programs will be rising for everyone.

So why is your unemployment tax rate rising?

The Basics

Each state operates its own unemployment compensation program that is funded largely by taxes on employers, not money withheld from employees.

• The tax applies once your business pays an employee over a 20 week period or at least $1500 in a calendar quarter.

• Unemployment tax is paid in two pieces – there is a net Federal FUTA tax rate of .8% after offsetting state payments, and your local State rate.

• Each state has a maximum annual wage amount to which the tax applies – generally about $9000.

• Rates are individually assigned to each business each year, and every state uses an experience rating system which takes into account several factors, including the layoff rate for your business, and a so-called “experience rate” based on the overall unemployment benefits paid out during the year for your state.

• This “experience rate” is paid by all new businesses, until they can develop their own history of wages paid versus layoffs (usually 1-3 years), and is also a factor in setting annual rates for experienced businesses.

• The tax receipts are set aside in separate accounts by employer into an unemployment trust fund from which benefits are paid to laid off workers.  When funds run low in times of high unemployment, the states can borrow funds from the Federal Government to supplement the employer paid funds.

Saving Your Business Money

Keeping the number of unemployment insurance claims filed by former employees to a minimum can produce payroll tax savings and have a positive effect on your experience rating.  Monitor all claims – respond to correspondence from State Unemployment agencies and be prepared with good documentation to contest any claims you feel are improper. Unemployment benefits are intended for those who find themselves without work because of lack of work. Generally unemployment compensation should not be paid in cases where there was cause for dismissal.

A company’s experience rating can also be a valuable asset in the event you are purchasing a business.  Don’t overlook the potential savings of the possibility of transferring the state experience rate along with the positive balance in their trust fund account.

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