Businesses Faced with Rising Costs of Unemployment Taxes
Federal and state unemployment taxes are part of the cost of doing business for an employer. For a PEO, or any employer, these costs are a component of the fees assessed on the gross payroll reported by the owner. Each state assigns a tax rate percentage to the employer based on the amount of taxes paid in over a 2-3 year period on the reported wages for the business. The state then applies a formula based on unemployment claims paid on ex-employees, as well as an adjustment factor for job placement services, overhead and reserves.
In the past, unemployment claims had been historically small, since the unemployment claim system was designed to be a temporary bridge for employees who were between jobs. With unemployment exceeding 10% in many states for 3 years now, states and the federal government have been paying out much more in claims than they are collecting from employer taxes. Further compounding the problem is the federal government extending the amount of time a person can receive benefits.
According to the U.S. Department of Labor Employment and Training Administration (ETA), by Oct. 20, 2010, 31 states had outstanding loans from the federal government totaling over $40 billion with loan balances estimated to reach as high as $90 billion by 2013. Twelve states have loans over $1 billion. In order to repay these loans, many states willincrease their maximum SUTA (State Unemployment Tax Act) rate, levy or increase the tax %, raise the wage base, and/or scale down the unemployment benefits for jobless. These changes impact all businesses in that state regardless of a good or bad rating. Thus, employers need to be prepared for the increased employer tax burden for 2011 and beyond. According to Talx, a leading analyst for unemployment tax data, employers nationally experienced a 33% increase in 2010 unemployment tax rates (to an average of 3.02%). A survey completed by the National Association of State Workforce Agencies (NASWA) shows that 35 states raised unemployment insurance taxes in 2010 with a median increase of 27.5% over 2009.
A PEO (professional employer organization) can help reduce the risk of higher unemployment tax rates. The PEO contests as many claims as possible and assists employers in preparing to defend new claims. They also work together with owners to remove incorrect claims from state tax accounts. In many states, a PEO can aggregate many employer groups together into a large tax account where the tax rate can be more stable from one year to the next. Increases in the PEO’s tax rate in many states at the end of 2010 may result in an increase to that portion of the client’s fee in early 2011.
Business owners should review their internal procedures for hiring and terminating employees. Improving these procedures and following them consistently can make a huge impact on the cost of unemployment tax that the business would have to absorb in the following year.
In the past, unemployment claims had been historically small, since the unemployment claim system was designed to be a temporary bridge for employees who were between jobs. With unemployment exceeding 10% in many states for 3 years now, states and the federal government have been paying out much more in claims than they are collecting from employer taxes. Further compounding the problem is the federal government extending the amount of time a person can receive benefits.
According to the U.S. Department of Labor Employment and Training Administration (ETA), by Oct. 20, 2010, 31 states had outstanding loans from the federal government totaling over $40 billion with loan balances estimated to reach as high as $90 billion by 2013. Twelve states have loans over $1 billion. In order to repay these loans, many states willincrease their maximum SUTA (State Unemployment Tax Act) rate, levy or increase the tax %, raise the wage base, and/or scale down the unemployment benefits for jobless. These changes impact all businesses in that state regardless of a good or bad rating. Thus, employers need to be prepared for the increased employer tax burden for 2011 and beyond. According to Talx, a leading analyst for unemployment tax data, employers nationally experienced a 33% increase in 2010 unemployment tax rates (to an average of 3.02%). A survey completed by the National Association of State Workforce Agencies (NASWA) shows that 35 states raised unemployment insurance taxes in 2010 with a median increase of 27.5% over 2009.
A PEO (professional employer organization) can help reduce the risk of higher unemployment tax rates. The PEO contests as many claims as possible and assists employers in preparing to defend new claims. They also work together with owners to remove incorrect claims from state tax accounts. In many states, a PEO can aggregate many employer groups together into a large tax account where the tax rate can be more stable from one year to the next. Increases in the PEO’s tax rate in many states at the end of 2010 may result in an increase to that portion of the client’s fee in early 2011.
Business owners should review their internal procedures for hiring and terminating employees. Improving these procedures and following them consistently can make a huge impact on the cost of unemployment tax that the business would have to absorb in the following year.