By Rori Carney
The combined cost of FICA (social security), FUTA (federal unemployment) and SUI (state unemployment insurance) taxes on employers can be significant. If an overpayment of any one of these taxes is inadvertently made, negative financial consequences can result. Taking steps to mitigate such overpayments, whether before or after they occur, is the role of those responsible for managing their employment tax costs.
This post will highlight some of the most common causes of overpaid employment taxes: SUI rate revisions, mid-year wage base carryover, multi-state SUI sourcing, out-of-state SUI wage credits and other credits on employer’s accounts that can go unclaimed for years.
Mitigating the overpayment of employment taxes can reduce future tax costs or present an opportunity to recover those taxes already overpaid. Having a plan in place to identify and recover potential tax overpayments can help produce meaningful financial benefits to an employer.
There are many instances that can lead to the issuance of a revised SUI tax rate: proactive statutory savings elections (e.g., voluntary contributions or joint account formation); the processing of a transfer of experience associated with workforce movements from one employer to another; amendments to taxable wages; benefit charge adjustments, and errors in a taxing jurisdiction’s calculation of an employer’s SUI tax rate. When rates are revised in favor of the employer, this can result in an overpayment of SUI taxes.
When employers onboard employees as a result of a mid-year acquisition of another employer’s trade or business, or portion thereof, they often treat the employees as “new hires” and restart the annual taxable wage base limits for FICA, FUTA, and SUI tax purposes. Many transactions, including the internal movement of employees from one legal entity to another, can qualify for “successor” employer status and do not typically require wage base restarts. The successor requirements differ slightly between federal and state jurisdictions, and even further between state unemployment agencies, so the laws of each jurisdiction should be reviewed to determine if successor status is appropriate.
All unemployment agencies have adopted a uniform “four factor” test to determine where each employee’s state unemployment wages should be reported (i.e., “sourced”). The test is applied in the following order of priority:
Localization of Services
Base of Operations
Place of Direction and Control
Residency
The objective of the SUI sourcing provisions is to cover under one state’s law all of the services performed by an employee for one employer, wherever the services may be performed. When an employer reports wages to every state in which an employee performs some services during a calendar year, not only does this complicate unemployment claims administration, it can also increase the likelihood that the employer has overpaid SUI taxes.
If an employer follows the SUI sourcing rules described above, and it is determined that a mid-year permanent change in the SUI sourcing state is required, employers can count the wages paid in one state to help determine the annual taxable wage base limit in the next state(s). Most jurisdictions (except Louisiana, Minnesota, and Montana) allow use of out-of-state wage credits. If the wage credits are not properly applied, an overpayment of SUI tax can occur.
The common causes of overpaid employment taxes discussed here can result in an employer having credits on their accounts, which often go unclaimed. It is prudent for employers to perform periodic “audits” by:
Calling the taxing jurisdiction
Visiting the taxing jurisdiction’s website or account portal
Reviewing notices and other state-issued documents that may contain references to unused credits
Is all of this a little confusing? We have subject matter experts at Equifax Workforce Solutions who can help you reduce or possibly avoid, mitigate, or recover potentially overpayment of employment taxes. Contact us to have someone get in touch with you, or check out this case study where we helped a financial institution recover $2.4 million in employment taxes.
The information provided is intended as general guidance and is not intended to convey any tax, benefits, or legal advice. For information pertaining to your company and its specific facts and needs, please consult your own tax advisor or legal counsel. Links to sources may be to third party sites. We have no control over and assume no responsibility for the content, privacy policies or practices of any third party sites or services.