Employer Unemployment Costs – The Financial Impact of Unemployment Claims on Employers

Employer Unemployment Costs – The Financial Impact of Unemployment Claims on Employers


Employer Unemployment Costs

The Unemployment Insurance (UI) process is run and funded by state (SUTA) and federal (FUTA) taxes that are paid by the employers. Every employer should be familiar with employer unemployment costs and that they must contribute to the UI tax pool for their employees. FUTA, like FICA, is essentially a payroll tax and does not increase or decrease based on any factors an employer can control.  Therefore, this article is solely about SUTA, The State Unemployment Tax Act.  But exactly what kind of financial impact could UI claims have on an employer?

The impact varies by state. Although employers fund the UI system, there are three states—Alaska, New Jersey and Pennsylvania—which require a small amount of UI tax funds from employees.  However, none of the money collected by employee contributions is used to pay UI benefits.  That money comes exclusively from employer contributions.

Each state has its own method for calculating employer unemployment costs and the tax rate an employer pays. Typically, the UI tax rate is based on the employer’s taxable payroll, the amount the employer has paid into the UI system, and the number of UI claims against the employer. This is called an experience rating, and it can go up or down over time depending on the employer’s payroll and history with unemployment claims.

Increased Tax Rates
The cost of an individual UI claim depends on what the state’s maximum benefit amount is, how much the employee made, and how long they remain on unemployment.

Employers pay UI taxes quarterly though payroll forms based on the taxable payroll during that quarter multiplied by the UI tax rate (i.e $1M of taxable payroll with a tax rate of 5% =$50K of UI taxes).  The State then pays UI benefits to the eligible claims from the pool of money created by employer taxes.

Many state formulas use a three-year moving period to assign a tax rate, though some states use a formula that considers the UI experience during the life of the company. Therefore, each awarded UI claim can affect three years of UI tax rates, if not longer. Employers often don’t realize the real employer unemployment costs of a claim since it’s spread out over a long period.  Not winning claims can cost employers tens of thousands of dollars annually, if not more.

Help Lower Your UI Costs
Employers can be proactive to help keep employer unemployment costs low. Hiring workers that are the most qualified is a smart choice. Hiring only for positions needed helps prevent layoffs or instances where the employee is simply not a good fit. It’s also wise to keep careful documentation of any problems or issues with employees so that in the event they are terminated; those records are there to be viewed.

It’s difficult for most employers to understand the nuances of UI eligibility, so they may not realize that some employees are not eligible to collect benefits. Employer unemployment costs can be lowered by contesting claims of employees who are fired for misconduct or who simply quit. You can also outsource unemployment claims. Having a trusted adviser who is more knowledgeable can help employers avoid UI benefit charges and help keep their UI tax rate low, saving thousands of dollars.

Industrial U.I. has the expertise you’re looking for. Contact us today to learn more about how we can help you manage your UI claims and avoid the high costs associated with them.

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