Employers in every state are required to make contributions to their state’s unemployment agency. These funds are used to cover the amount of unemployment compensation individuals in that state receive should they become unemployed. Because of the penalties associated with not paying these contributions, it’s vital that organizations of all sizes and industries understand as much about this subject as possible.
As a leading provider of payroll tax services for Workday, we routinely receive questions about state unemployment rates. That’s why we’re using today’s blog to share some of the most common ones that we receive about this topic.
What are state unemployment rates and how are they determined?
State unemployment rates are set by each state to cover what they expect to pay during the upcoming year. Your organization’s rate is determined by your most recent contributions as compared to the amount of benefits paid. When more unemployment benefits are paid, future unemployment rates will be higher. Each state uses a specific calculation to determine the final rate. Many states use the common law method that determines the employee status under the Federal Unemployment Tax Act, while more than half use the “ABC” method.
How does the amount of unemployment tax paid to a state reduce the amount of Federal Unemployment Tax paid?
If the state unemployment is paid timely during the year, the actual amount paid—up to 5.4 percent—can be deducted from the amount of Federal Unemployment Tax you owe. In many states, other components of the state unemployment rate cannot be applied against the Federal Unemployment rate. For instance, in Alaska, New Jersey and Pennsylvania, employees must contribute to the state unemployment. This contribution is not considered when determining the amount of state unemployment tax you can deduct from the Federal Unemployment Tax.
When are unemployment rates effective, and what documentation does OneSource Virtual require for the proper updating of those rates?
With the exceptions of New Jersey, Tennessee and Vermont, unemployment rates are effective January 1 of the calendar year. The three states noted above change their rates on July 1. State unemployment agencies will notify the employer of their applicable rate within a few months before or after the effective date. Generally, OSV will need a copy of the rate notice to assume responsibility for updating the rate in Workday and in TaxEx.
Are there other parts of the state unemployment law that employers need to be aware of?
Twenty-seven states allow employers to make a voluntary contribution to increase their reserve ratio, decreasing their unemployment rate for the upcoming year. But employers should use caution to ensure that this voluntary payment will truly help them. Caution should also be used to verify that the contribution is made to the state within the established time limits.
Do You Still Have Questions?
While it’s not pleasant to think about, unemployment happens. But with the contributions state unemployment agencies receive from organizations like yours, they can temporarily alleviate—to some degree—the financial strain that comes with losing a job. Because of this, and because of the penalties that come with not making these contributions, understanding the basics around state unemployment rates are crucial. If you still have questions, your payroll tax specialist would be happy to help you answer them.