If you have been following data from the United States Department of Labor (USDOL), it is no surprise that the U.S. has seen unprecedented numbers of unemployment claims filed and national unemployment rates not seen since the 1960s.  In data released on the USDOL’s website (https://oui.doleta.gov/unemploy/), the level of seasonally adjusted claims has dropped slightly, which coincides with activity we have seen at Corporate Cost Control.  However, it has not dropped as much as we had anticipated.

Employers all over the country are asking themselves and Corporate Cost Control how to stem the tide of increases in unemployment tax rates.  The increases themselves are inevitable since nearly half of the states are already borrowing from the federal government via Title XII loans because their state unemployment trust funds have been depleted.  For many years, the USDOL has recommended states should improve their trust fund balances because, based on their analytical data, more than half would not have the funds to properly pay for unemployment benefits in the event of an economic downturn.  In its 2020 Solvency Report, published in February 2020, the USDOL reported that 22 states and jurisdictions were below the recommended threshold.  Now, we find ourselves in one of the worst recessions seen in quite some time, and the USDOL’s predictions have come to pass.

Contributory employers are required to pay tax on a certain amount of earnings for each employee in all states in which they do business.  The tax rates are calculated based on historical data, which typically runs from July 1 through June 30 of the prior year, but the fiscal period differs from one state to the next; so, too, does the mathematical calculation itself.    The tax rates are recalculated annually, which means they can change annually as well.  A couple of the components used to calculate the rate are controlled by the state legislature, meaning employers have no control over them.  Taxable wage bases and tax rate tables or surcharges can increase or decrease based on statute or, more commonly, based on the unemployment trust fund balance.  Since trust fund balances are being depleted at a rapid pace, they will also need to be replenished.  Employers are on the hook for replenishing the depleted trust fund balances, which are managed by increased taxes.

We anticipate employer tax rates to be higher in most states for 2021 and beyond.  Our hypothesis is based on a review of statutes as well as the tables in use during the last recession, which was not nearly as bad.  A few of the state unemployment agencies have already mailed their tax rate notices for 2021, but several of them use a fiscal year outside the period, which includes the pandemic unemployment claim influx.  Therefore, the impact to those states’ rates won’t be seen until the 2022 tax rate year.  Most states, however, use a fiscal period that goes through June 30 or even September 30 of the prior year.  These states, in particular, will likely see an increase to the tax rate schedule, surcharges, or taxable wage base and likely not only for 2021.  Replenishing the trust fund accounts to adequate levels will take years, so employers should expect increased unemployment tax costs for several years.

While there are uncontrollable factors associated with your unemployment tax rates, there are also factors and options over which employers do have control that can positively influence them to reduce the overall tax cost.   Diligent claims administration can reduce the amount of benefits paid out of your tax accounts for claims filed by former employees.  Just because an employee is unemployed doesn’t mean the person is entitled to benefits from the UI system.  Unemployment benefits were initiated in the 1930s during the great depression to temporarily assist those who were out of work due to layoffs.  Since then, benefit entitlement has greatly changed in favor of the employee, so now, former employees can collect even if they have been discharged or voluntarily quit.  Proper documentation and education of front-line managers can help in proving misconduct and getting the former employee disqualified for benefits.

Outside of the claims world, many states also offer options for employers to reduce their unemployment tax rates for one or multiple years.  Voluntary contributions, allowed in 27 states, enable employers to essentially buy down their rate for the coming year.  The key is to pre-pay enough to change the ratio between the taxable payroll and the account balance so that it changes the resulting rate from the table.  For example, on the 2020 Missouri tax rate table, if you have a ratio of 10.5% but less than 11.0%, you are eligible for a rate of 1.056%.  If your calculated ratio for the above example was 10.99%, you could likely make a relatively small voluntary contribution to change the ratio to 11.0% and obtain a rate of 0.968%.  The net savings is the tax reduction minus the voluntary contribution amount.  Below is how this is illustrated on the 2020 Missouri Table of Rates:

 

10.5% but less than 11.0% The rate is 1.056%
11.0% but less than 11.5% The rate is 0.968%

 

This is an oversimplification of the calculation, but it is representative of the tax implication—the greater the taxable payroll, the greater the tax savings in this example.  The great news about this option is that it is only a one-year computation, and employers have the option of calculating it prior to paying taxes for the upcoming year.  So provided an employer has a solid projection of what its taxable payroll will be in the coming year, this could render a significant tax reduction.

Another statutory option for employers is through joint accounts or common rate opportunities.  A few states allow employers with multiple entities in their state to combine the tax rate experience of some or all of them to allow for a lower overall tax cost.  Unlike the voluntary contribution option, some states require a multi-year lock-in for joint accounts, so there is greater risk.  But since it is not a legal merger, the entities continue to report separately; they merely share the same unemployment tax rate.

Few employers are aware of these options, and those that are, don’t necessarily have the staff or intel to compute them.  This is one of the many reasons employers choose a third-party administrator like Corporate Cost Control to help them manage these spiraling costs.  In partnership, CCC and its customers work side-by-side to manage and control unemployment tax costs and, over time, reduce tax rates.  The future of unemployment tax for employers is perilous due to the current recession, so a valued partner to assist would positively affect the impact.  Contact us if you would like a quote or have questions about your UI Tax Rates.


Contact CCC to see how we can save your organization time and money.
Contact our Sales Team
(800) 207-6926

Featured Videos

View All Videos

Latest News

Close

Sales

    Your Name:*

    Title:

    Company Name:*

    Company Address:

    Company City:

    Company State:

    Company Zip:

    Number of Employees:

    Your Email:*

    Phone Number:*

    Fax Number:

    Check the boxes below if you wish to receive information on any of the following:

    Unemployment Cost ControlTax Credits & Incentives (WOTC)Employment / Wage Verification

    Your Message:

    Employment & Income Verfication

      Your Name:*

      Title:

      Company Name:*

      Company Address:

      Company City:

      Company State:

      Company Zip:

      Number of Employees:

      Your Email:*

      Phone Number:*

      Fax Number:

      Your Message: