Unemployment Insurance Tax 101

Understanding Your Tax Rate

For the uninitiated, the calculation of their organization’s unemployment tax rate can be a puzzle. This is especially true if the organization operates in multiple states with multiple tax finance methods. The goal of this blog is to explain the key elements of a unemployment insurance (UI) tax rate and how it all results in the annual rate.

The first thing to remember is that while your rate is effective for a calendar year, the calculation of the rate is based on a fiscal year. Most states use a July 1st to June 30th fiscal period to determine the next calendar year’s rate. The “experience” (taxable wages, contributions, and benefit charges) of the period is used to assign the new rate. It’s not an apples to apples comparison if you’re viewing it on a calendar basis.

The key ingredients that go into the determination of your UI tax rate are important to understand as well. Each state has its own finance method and use these elements in different ways.

1. Taxable Payroll Each employer pays UI taxes on what is called the taxable wage base. This is an amount determined by the state for each employee.For example, if your state’s taxable wage base is $12k, you only pay UI taxes on the first $12,000 that each employee earns during that calendar year. Once they meet that threshold you no longer pay UI tax on those employees. The taxable payroll rolls up into an average total and is a major component in your UI tax rate.
2. Account BalanceIn states in which an employer maintains an account balance, this is an important figure to understand. All tax contributions paid in the fiscal period are credited to your account balance. When the tax rate is determined for the next calendar year, it is based on the ratio of your account balance by an average taxable payroll.
3. Benefit Charges No matter which finance method is used, benefit charges are a very important element. Simply put, the fewer charges assessed to your account, the lower your UI tax rate will be.In states in which employers maintain an account balance, these charges are deducted from the balance. Depending on your taxable payroll, it could cause an increase in rate.In states that use the benefit cost method, the benefit charges are even more important. The benefit cost method is a direct relationship of the benefit charges to your average taxable payroll. This method can be more volatile as the charges are not defrayed by an account balance.
4. Reserve/Benefit Ratio Regardless of the tax method used, your account is assigned a ratio based on your experience. That ratio is assigned to a tax table which determines your next year’s rate.In states using the account balance method, this ratio is your account balance/average taxable payroll. If they use the benefit cost method, it is the benefit charges/average taxable payroll.

It’s very important for you to understand how your state handles each of these elements. For example, states will use varying number of years to determine your average taxable payroll. Once you understand how the system in your state functions, you can plan and budget better for future UI tax expenses.

U.I.S. provides comprehensive unemployment cost control and claims management services, including UI tax rate and benefit charge audits. Put our expertise to work for you— contact us today!