State unemployment insurance tax is a mystery to most new business owners. But it’s the only tax rate employers can control. By implementing a few procedures early on, hundreds of dollars per employee can be saved every year.
Following are excerpts from an interview with Susan Mravca, CEO and co-founder of JuvodHR, who is working on unemployment insurance reform with the Small Business Advocacy Council in Illinois.
How is unemployment insurance calculated?
Unemployment insurance is based on a percent of tax taken from base wages. The rates differ by state. For example, in Illinois, the first $12,960 of each employee’s income is the base wage, and new businesses are taxed at a rate of 3.75%. So the unemployment insurance tax for a single employee at a new business in Illinois is $12,960 x .0375 = $486.00 per year. In California, the first $7,000 is the base wage, and it’s taxed at a rate of 3.4%, which works out to $238 per employee each year.
This “percentage” multiplier can be controlled and used to lower taxes. The more unemployment claims former employees successfully make, the higher the multiplier will be for a business. The range of rates for a 10-person company vary greatly based on the company’s history.
Continuing the example, in Illinois, the percentage multiplier can vary from .55% to 8.15%, whereas in California, the range is from 1.5% to 6.2%. Paying a rate based on a multiplier of .55% rather than 8.15% can save a business real money.
New business owners will pay the “New Employer” unemployment insurance tax rate for the first three years of operations. Like all other unemployment insurance taxes, it is set differently from state to state. This rate never goes down for the first three years, but it can go up. It only goes up, however, if there are successful unemployment claims against a company. As such, tax rates can be controlled by effectively managing unemployment claims by former employees.
What triggers unemployment claims?
Unemployment claims against a company occur when:
- A company downsizes, laying off employees. This is the purpose of unemployment insurance.
- Employees are terminated for cause. The employee is collects unemployment insurance by filing a claim and wins because there is no documentation to prove the dismissal was for valid reasons.
- An employee quits. They collect unemployment insurance because there is no documentation to prove they left voluntarily.
What can an employer do to manage their unemployment rates?
Approximately 65% of disputed unemployment claims are lost by employers due to a lack of valid documentation. The good news is that unemployment insurance claims can be managed with proper and valid documentation.
To control unemployment insurance rates, a new business must:
- Create job descriptions for employees. Employers and employees must have a written understanding of expectations. Thus, when expectations are not met, the employer has proof the employee was aware of expected work behaviors. For a simple way to quickly create job descriptions use JuvodHR’s job description wizard.
- Have employees sign job descriptions or employee handbooks providing proof that they agreed to and understood acceptable workplace behaviors.
- Create a protocol for written warnings. All warnings must be documented and signed by the employer and employee (or a witness if the employee refuses to sign).
- Review employees. The best reviews are based on the employee’s job description.
- Terminate for cause based on the job description. This can also be applied to the employee handbook.
- Have an explicit statement from employees who quit. Insist on a resignation letter, or have a process in place.
- Deny claims promptly. Deliver documentation with the claim-denial forms.
- Closely monitor the unemployment insurance tax rate. Following the initial three years with no claims, the tax rate should decrease substantially.
What do you mean by valid documentation?
Valid documentation includes providing employees with performance reviews on a regular basis and corrective action notices when needed. The number one factor that will help protect a business from false claims is consistency. When all employees receive corrective action notices for violating company policies or not complying with the terms of their job descriptions, the chance of denying spurious unemployment claims increases significantly.
What happens at the end of three years?
At the end of three years, a new rate will be assigned from the state unemployment office. If there haven’t been any claims against the company, the rate will go down for the next year. If there is a high level of claims, the rate will go up. Check with an accountant or local unemployment insurance office for the rate in your state, and be sure to verify you are being charged correctly.
The unemployment insurance tax rate is manageable. Its true cost can be controlled through basic employee management. Build job descriptions, give performance reviews and levy corrective action notices. As a result, your claims and tax rates will be lower. Then, you can keep those extra dollars to grow your business.
Susan Mravca, a serial entrepreneur, is CEO and co-founder of JuvodHR, an expert system in Human Resources designed for small businesses yet equal to that of large corporations. Users can search for pre-written job descriptions and immediately edit them to their own business needs. JuvodHR then automatically creates a valid Performance Review, built 100% on the job description, providing a simple, clean way to rate employees. For more information go to JuvodHR.com.