By Tom Towson
A prudent tax professional always has a plan, but when it comes to anticipating unemployment costs and reducing looming SUI tax burdens, ensuring your organization is adequately prepared can feel like having only two bags of chips at your all-employee event. It’s critical that your unemployment cost management program encompasses both claims and tax management strategies. Thankfully, there are a number of different tax management strategies employers can utilize to help reduce future SUI tax burdens.
Currently, 26 states permit employers to make voluntary contributions (VCs) to their unemployment accounts. If paid within a specified period, VCs reduce the employer’s tax rate and depending on the state, an employer’s rate may be decreased by one or more rate table brackets, even to a minimum rate in some states.
This special payment increases the employer’s reserve balance in reserve ratio states or decreases the benefits charged against the employer in benefit ratio states. Once the state receives the VC, the tax rate is recomputed using the new factors.
Another item to consider before submitting a voluntary contribution payment is whether any outstanding delinquencies exist on an employer’s account. If so, the VC may first be applied to the debt and then to the rate calculation, creating a shortage in the amount necessary to reduce the tax rate. Voluntary contributions are also generally nonrefundable. If an employer miscalculates and underpays the voluntary contribution, the state may not allow an additional payment or return the insufficient amount. Likewise, if the employer pays in excess of the amount needed to reduce the rate, the state may not refund the overpayment.
Voluntary contribution deadlines vary from state to state. Many state deadlines are set at a specific date by law, while others provide a certain number of days after the issuance of the rate notice to make a VC.
Several states offer employers the option to reduce unemployment taxes by forming a JA (also referred to as a common rate group). The formation of a JA permits two or more legal entities to combine their state unemployment experience rating factors to obtain a single or common SUI tax rate applicable to all members electing to participate in the group. The goal is to achieve a lower combined unemployment tax cost for the members as a whole.
The combination is strictly for SUI rating purposes and does not require changes to organizational or legal entity structures. Each JA member will continue to file their quarterly contribution reports utilizing their respective SUI account numbers, with limited exception. Factors used to determine if a JA is beneficial include:
Planned changes in organizational structure due to mergers, acquisitions, reorganizations, or divestitures that may impact the underlying experience of the members or change the make-up of the members eligible to participate in the joint account.
Anticipated material changes in workforce for any of the electing members. A fluctuation in SUI taxable payroll may impact anticipated tax savings.
All possible legal entity combinations, including unaffiliated legal entities in certain jurisdictions.
Modifications to existing joint accounts.
Concurrent use of voluntary contributions to help maximize profitability. Consideration should be given to the use of a VC in conjunction with the formation of a JA. A VC can help significantly improve the profitability of the JA requirements, including:
Application deadlines
Minimum duration (“lock-in” period); the longer the lock-in period, often the riskier it becomes
Dissolution provisions
Ownership restrictions
Alaska’s SUI rating system is based on an employer’s experience with quarterly wage declines. If an employer has a decline in “reportable” wages (not taxable wages) from one quarter to the next, this decline in wages is known as a quarterly decline. For rating purposes, a quarterly decline quotient is calculated, which is the percentage decrease in wages from one quarter to the next. All the quarterly decline quotients for an employer’s qualifying quarters are added together, and this total is then averaged. A SUI tax rate is then assigned based on this average of all the quarterly decline quotients.
Several factors may create artificial quarterly declines. If an employer pays bonuses or lump-sum payments, or pays bi-weekly, the state workforce agency may be able to lower the employer’s contribution rate by removing the effects of artificial declines created by these situations.
Employers can elect to remove the negative impact on the quarterly declines in the above situations by choosing to either delete or apportion the wage payments in order to obtain a more favorable rate.
Careful consideration should be given when choosing the decline method or the appropriation method, as once one is chosen, it is effective for future years and may not be changed without state workforce agency approval. Employers are required to file an “option form” for every quarter in which their artificial decline situation arises.
Options may be used to change a rate retroactively. Through June 30, options can be used to correct the rate for the preceding calendar year as well as the current year. Beginning July 1, only the current year’s rate can be changed, but the lower rate would be retroactive to January 1 of the current year.(1)
The state of Arkansas allows employers to elect to use a one-year taxable payroll factor in its SUI tax rate computation instead of the standard three or five-year average taxable payroll. If a one-year taxable payroll factor is less than the three or five-year average, the one-year payroll factor election must be requested in writing with the state workforce agency by July 31 of the year prior to the year the election is to become effective.(2)
From the inception of an employer’s SUI account in New York, when unemployment benefits charged to an employer’s account exceed the contributions paid in and credited, the result is a negative reserve account balance and the SUI tax rates are based on the employer’s negative reserve ratio. On December 31 of any given year, if an employer’s negative reserve account balance exceeds 21% of its most recent fiscal year taxable payroll (from October 1 to September 30), the portion above 21% is mandatorily transferred out (i.e., “written-off”) of the employer’s account by the state, and charged to the General Fund. For the following year, the employer is assigned a normal rate based on the employer’s negative account percentage prior to the transfer and, for the three succeeding years, will be assigned the maximum rate for that year’s size of fund index.(3)
For example, an employer with a transfer to the General Fund on December 31, 2021 (i.e., the 2022 rate year), will be assigned a normal rate for 2022. For the 2023, 2024, and 2025 rate years, the employer will be assigned the maximum tax rate.
However, an employer may elect to make a special payment to avoid the maximum SUI tax rate assignment for three years. The due date for this special payment is March 31 of the impacted year. A cost-benefit analysis should be performed to determine if the expected savings from a reduced SUI tax rate for three years sufficiently exceeds the amount of the special payment necessary to repay the amount of the write-off.
Employers seeking to utilize the special payment provision should be mindful of the following scenarios:
Anticipated organic growth within the state of New York. The addition of new employment (i.e., an increase in taxable payroll) within an account can significantly alter the calculation of the savings and can present increased risk to employers assigned the maximum SUI tax rate for three years.
Merger & acquisition plans within the state of New York. When an employer acquires the business operations of another employer, a SUI tax rate impact analysis should be performed. As part of the analysis, a negative write-off calculation should be incorporated, if applicable, to prevent an unexpected assignment of the maximum SUI tax rate to an acquiring employer for three years.
Employers are often unaware of the long-term implications a state mandated write-off can have, which can be complicated further if write-offs are made in two or more consecutive years.
In Pennsylvania, a higher SUI tax rate is assigned when an employer’s reserve account has a negative balance. If the benefits charged to an employer’s reserve account exceed the amount of contribution credits to the employer’s reserve account by more than 20% of the employer’s annual payroll, the employer may elect to have its reserve account downwardly adjusted to a negative balance equal to 20% of its average annual payroll. Upon election, the maximum experience rate will be assigned for the current and the following two calendar years. This could result in a lower rate in subsequent years if benefit charges are negligible during the three years that the election is in effect.
The election must be made in writing after January 1 but no later than April 30 of the tax year in question. The request is not revocable after 10 days from the postmark date.(4)
Understanding SUI tax burdens and how to best prepare is far from simple. Employers should take prompt action to implement a strategy prior to when SUI tax rate notices are issued.
This strategy should include identifying the authorized representative or officer available to review and approve any special rating strategy elections to help ensure timely submission. After implementation, employers must be diligent in their follow up with the state workforce agencies to help ensure the proper SUI tax rate(s) has been assigned.
The Equifax team of experts understand each states’ rating calculations, and can assist your organization with planning strategies to identify cost savings opportunities. Please reach out to your Equifax representative for further information on planning strategies to help reduce SUI tax burdens. Not a current client? Contact our Employment Tax Consulting Group to learn more.
Per Alaska Unemployment Insurance Tax Handbook.
Per Arkansas Division of Workforce Services Employer Handbook.
Per New York State Department of Taxation and Finance Employer’s Guide to Unemployment Insurance, Wage Reporting, and Withholding Tax.
Per Pennsylvania Office of Unemployment Compensation website (Debit Reserve Balance Adjustment).
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.