July 2018 ETS Tax Intelligence: Insights from SUI Tax Rate Forecasting

Situation

In most states, the computation date used to calculate state unemployment insurance (“SUI”) tax rates is June 30th. So while most employer-specific measures used by state workforce agencies in calculating SUI tax rates have been determined, states will wait until the beginning of the rate year to issue 2019 rate notices. This time gap between when rates can be determined and when rates are actually issued delays an employer’s ability to forecast future SUI tax costs and gain insights from this key performance indicator (“KPI”).

Solution Tax Rates as Key Performance Indicators (KPIs)

Tax rates, as KPIs, allow an employer to assess the success of its unemployment cost management program, from a claims administration and a tax rate management perspective. As with most KPIs, SUI tax rates are a lagging indicator; if not calculated and used timely, they can lose their relevance. Forecasting 2019 SUI tax rates during the third quarter of 2018 allows employers to amass insights sooner to enable the assessment of past practices and formulate new leading practices to positively impact 2020 SUI tax rates (actions taken now will not typically impact 2019 rates, but 2020 rates six quarters in the future).

SUI Tax Rates are One Component of Tax Costs

On average, SUI tax rates have been on the decline during the five most recent calendar years , despite U.S. Department of Labor warnings that 29 taxing jurisdictions are not sufficiently solvent and 50 taxing jurisdictions have inadequate average tax rates to meet the minimum adequate level of financing . When forecasting SUI tax costs, the tax rate is but one component. In recent years, annual taxable wage bases, individual employee earnings, and employee headcounts have been on the rise in the U.S. If an employer’s increase in taxable payroll outpaces reductions in SUI tax rates, an employer might expect an increase in overall SUI tax costs.

States Rating Calculation Methodologies

No matter the state in which an employer operates, fiscal year increases in benefit charges will have a negative impact on SUI tax rates. However, the same cannot be said for increases in taxable payroll. In states that use a “reserve ratio” calculation methodology to determine SUI tax rates, sizeable increases in taxable payroll during the rate computation period will likely cause tax rates to increase (assuming a positive reserve account balance and all other factors being equal). The reason for this is that these 30 or so reserve ratio states take a philosophy that as taxable payrolls increase so does the propensity for the employer to pay out unemployment benefits in the future. “Benefit ratio” states on the other hand take a philosophy that as annual taxable payrolls increase, there will be more of a tax base upon which to apply the tax rate, increasing tax revenues used to pay benefits.

Other Rate Forecasting Considerations

  • Mergers & Acquisitions and Other Employee Movements: When an employer undergoes activity that results in the movement of employees between legal entities, it will often require a transfer of an employer’s SUI rating experience. Knowing the quarter a SUI tax rate will be revised and the financial impacts of such a revision is important to employers in budgeting and managing unemployment tax costs.
  • New Employer Rates: When an employer first begins operations in a state, a new employer rate is assigned. Transitioning from a new employer rate can have an impact on future SUI tax costs. To avoid unexpected tax increases when coming off a new employer rate, it is prudent for employers to forecast SUI tax rates and determine the quarter/year a merit rate will be assigned. Statutory Elections: Forecasting SUI tax rates for 2019 can provide employers with insights into potential future voluntary contribution and joint account elections, which can assist employers to identify 2019 SUI tax savings.
  • California Title XII Loans: If California’s federal Title XII loans remain paid on November 10, 2018, its 2018 net FUTA tax rate will return to 0.6%. This would translate into a per employee maximum FUTA tax cost of $42 (0.6% x $7,000 wage base) versus $210 (3.0% x $7,000 wage base).

Value

In the states where employers have sizeable taxable payrolls, forecasting SUI tax rates allows them the ability to reduce exposure to risks associated with SUI tax cost changes year-over-year and provides timely insights into the success of historical unemployment cost management practices and introduce new leading practices. For more information, please contact Pete Krieshok at (314) 214-7325 or via e-mail at Pete.Krieshok@Equifax.com. You can also visit our corporate blog for information on other employment tax matters that might impact your organization. Download a PDF version of this bulletin.

Related Stories

Employment Tax Services Webinar: Help Make WOTC Work for You
Employment Tax Services Could You Qualify for Disaster Relief Tax Credits?