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While federal unemployment taxes have a fixed rate for all employers, state unemployment tax rates fluctuate. One key factor that can impact an employer’s state unemployment tax rate is the number of former employees who successfully claimed and collected unemployment benefits. Therefore, a company that lays off more employees will likely pay more in state unemployment taxes compared to a company with higher retention levels.

To protect against these risks and reduce state tax liability, every employer should establish an unemployment insurance compliance strategy. With such an approach, they cannot only avoid unemployment insurance costs, but also prevent unnecessary benefit payments, and remain compliant with various unemployment insurance regulations.

Who Pays for Unemployment Insurance?

Unemployment insurance is funded through a company’s payroll taxes. Each state administers its own unemployment insurance program, with the requirements to qualify for benefits varying from state to state.

The unemployment insurance program is funded by taxes on employers, including the Federal Unemployment Tax Act fee (FUTA) and the State Unemployment Tax Act fee (SUTA). FUTA tax is 6% of the first $7,000 of each employee’s wages, but employers who pay their state unemployment taxes on time are eligible for a maximum 5.4% tax credit. As a result, companies that qualify for the maximum tax credit end up paying 0.6% of the $7,000 wage liability, making the per-employee cost of unemployment insurance for FUTA $42 each year.

While federal unemployment insurance requirements are minimal, states are free to choose the level of employer tax, the benefit duration, and the eligibility criteria, such as the extent and duration of prior employment. As a result, there are considerable variations in how states run unemployment insurance programs, making it necessary for employers to research their state’s requirements to ensure unemployment insurance compliance. In addition to this, companies that operate in multiple states or have employees working remotely in different states may be subject to additional unemployment tax.

Key Elements of Unemployment Insurance Compliance Strategy

Due to its design and state variations, unemployment insurance is a remarkably complex program to manage, making it even more difficult for employers to work toward reducing their state tax liability and avoiding the impact of erroneous UI claims.

However, employers can protect their unemployment tax rate from rising and successfully challenge unemployment claims by establishing an unemployment insurance compliance strategy and maintaining a solid understanding of the unemployment claims process in their state. Here are some of the elements they can incorporate into the process of managing the unemployment insurance program to avoid unemployment insurance risks and protect their bottom line:

Ensuring that Employees Are Aware of Company Rules and Regulations

Every employee within the organization should be provided with a written copy of the rules and regulations outlining the expectations of employees, as well as disciplinary measures that are taken before a termination. Employers should be consistent with the application of rules and expectations and require every employee to sign an acknowledgment form indicating they have received the copy. If an employee refuses to do so, employers are advised to note that an attempt was made to obtain acknowledgment.

Having Proper Documentation

While documentation of everything may seem tedious and time-consuming, in the case of an unemployment dispute, proper documentation can make all the difference and help employers win. Therefore, employers should document everything, from basic information such as date of hire and pay scale, to unsatisfactory work performances, including warnings and suggestions for improvement.

Not Terminating Employment Without a Prior Warning

Firing an employee is stressful for all parties involved, but employers must do this appropriately to protect their company. Unless an immediate act occurs, an employee should be provided with feedback or a warning prior to being fired. Otherwise, it can be much harder to win an unemployment claim and prove that the employee knew or should have known that the behavior would result in immediate termination.

Understanding Their State’s Unemployment System

One of the key elements of an effective unemployment insurance compliance strategy is understanding how the specific state’s system works. To be eligible for UI benefits, some states require that employees have worked with a company for a specific time period, or have received a certain amount of compensation, and employers need to understand the UI regulations in their state. By responding promptly to state requests and reporting new hires and rehires, employers ensure that state agencies are provided with data necessary for accurate unemployment eligibility determinations.

Effective Unemployment Insurance Compliance Process

While it can take time to establish an unemployment insurance compliance strategy, ultimately employers can increase their chances of successfully managing unemployment claims, have a positive effect on their business, and reap the benefits for years to come.

There are many proactive measures that employers can take to keep unemployment costs low. Apart from smart and prudent hiring, there should be careful documentation and specific, actionable feedback to provide employees with opportunities to correct problems. Furthermore, automated unemployment claim management enables organizations to process claims accurately, consistently, and quickly, thus improving the efficiency of the processes and achieving significant cost savings.


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