Do you know your company unemployment insurance tax rate? It’s different for each business, and it changes every year.
Did you know that your unemployment insurance tax rate is the only tax you have control over? Being aware of the rules and implementing some simple procedures can save you hundreds of dollars per employee each year in your new or established business.
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A few words about the math:
Every state has identified employee “base wages,” which are taxable.
Unemployment taxes are calculated using a “multiplier” number as a “percent” of tax applied to employee base wages. This multiplier is state-specific and can be used to lower your taxes. The more unemployment claims past employees successfully win, the higher the multiplier will be for your business.
As a new business, you will pay the “new employer” unemployment insurance tax rate for the first three years of operations. During the first three years, the rate will never go down; however, it could go up.
Sample “new employer” rates per employee per year:
- New York: $438.70
- North Carolina: $223.00
- Colorado: $243.00
- Illinois: $460.08
How is it calculated?
Let’s use New York as an example.
In New York, the first $10,700 of each employee’s income is the base wage. New businesses in New York are taxed at a rate of 4.1 percent. So, the unemployment insurance tax for one employee at a new business in New York is $10,700 x .041 = $438.70 per year. In North Carolina, the first $22,300 is the base wage, and it’s taxed at a rate of 1 percent.
However, for existing business in New York, the percentage multiplier can vary from 2.1 percent to 9.9 percent, while in North Carolina, the range can be from 0.6 percent to 5.76 percent. Your business is considered “existing” after three years of business, and an adjusted rate is applied based on your history.
The difference between 0.6 percent and 5.76 percent in North Carolina means $1,104.24 per employee every year. This tax can cost you a bundle if you do not control it.
This percentage multiplier is controllable and readjusted every year. The lower the multiplier, the lower your taxes. If an employee files for unemployment insurance under false pretenses and wins, your tax rate will go up. And when it goes up, it goes up for your entire company, not just one employee.
Where do unemployment claims come from?
Unemployment insurance is designed to help employees who are laid off during downsizing.
However, former employees who have quit or are terminated for legitimate reasons frequently win unemployment insurance claims.
Employers lose about 65 percent of disputed unemployment claims due to a lack of valid documentation; that means that your focus should be to have proper documentation of your employees. This documentation will ensure that unemployment insurance is denied to employees who should not be eligible to obtain it.
The burden of proof to deny false claims is on the employer. It is not difficult to keep your unemployment insurance tax rate low—just follow these simple guidelines.
Actions that may result in unemployment insurance claims include:
- You downsize your company and lay off employees
- An employee quits
- You terminate an employee for valid reasons
7 ways to help lower your unemployment insurance tax rate:
1. Create job descriptions
When expectations are not met on the job, you, the employer, must have proof that the employee was aware of expected work behaviors.
So, you need signed job descriptions to show the employee knew what was expected.
2. Have employees sign employee handbooks
Beyond their specific job, your employee must know what is expected of all employees in the workplace.
3. Create a system for written warnings
All warnings issued in your workplace must be documented and signed by the employer and employee. You need to have a witness sign if your employee refuses.
4. Review employees
Make sure your employees get frequent feedback in the form of performance reviews.
Smart business owners provide employees consistent feedback and the best results occur when comments relate back to the employee’s job description.
Have a just cause for termination based on the job description. The reason an employee is rightly terminated should be based on the job description or handbook—both of which the employee should have signed.
5. Have a clear, written statement from employees who quit
When an employee quits, insist on a resignation letter. This is very important.
In Illinois for example, if an employee walks off the job, you have eight days to contact the employee to verify and document that they quit, otherwise they will win a claim at the unemployment office because you have no proof that they quit.
6. Deny unjust claims immediately
When you are notified of a new claim, make sure you respond within the time allotted on the claim form. If not, you will lose.
7. Always know your unemployment insurance tax rate
After three years with no claims, your tax rate should drop to the lowest possible rate in your state.
In 2016, a business in Colorado will pay between 2.13 percent and 9.67 percent on base wages of $12,200. For a 10 person firm in Colorado, that is the difference between $2,599 and $11,979 per year.
Consistency is key
Lowering your unemployment insurance tax rate is in your power.
The cost to your business can be controlled through basic employee management. Build job descriptions, give regular performance reviews, and provide and document corrective notices.
Implement a simple system of valid documentation to control your unemployment insurance tax rate, and successfully deny false unemployment claims. All of these steps will ensure that your business only benefits from unemployment insurance, and doesn’t end up suffering from it.
Then, you can use your saved dollars to expand and strengthen your business.
Susan is a serial entrepreneur, most of her ventures have been in the technology services sector. She is also the co-founder of an HR software company. Her most recent business is BarkerFun Inc. Her story about starting BarkerFun speaks volumes to how an entrepreneur can move from tech services to HR software to a consumer product in the pet space.
