4 Reasons to Double-Check Your Unemployment Insurance Tax Rate

By QuickBooks

4 min read

Do you know your unemployment insurance tax rate? When was the last time you checked it?

It’s important to consult an accountant from time to time to ensure your finances are in order. And since the unemployment insurance tax rate is the only one you can control and lower, it’s critical for business owners to periodically understand and monitor their rates. Your unemployment insurance rate is subject to change every year, and this fluctuation can mean thousands of dollars in your favor or to your detriment.

The rate is based on various factors, including the number of employees you’ve fired, laid off or have quit in the past three years. It’s also based on their earnings, as well as how long they were employed at your company.

Unemployment benefits are intended solely to aid workers affected by layoffs. Unfortunately, many businesses are forced to deal with court cases revolving around errors and fraudulent claims.

Mistakes in unemployment insurance can come in many forms. Here are four common issues that may lead you to overpay your unemployment taxes.

1. An Employee Has Made a Fraudulent Claim

Employees may win fraudulent claims if the employer does not have proper documentation of the separation or actions leading up to the separation. As such, it’s important to have a plan in place and outlined in your employee handbook for disciplining and/or firing an employee.

2. The Unemployment Insurance Office Has Wrongly Charged You for an Employee

The number of days and hours your employee worked is integral in deciding benefits. If the employee reported too many working days or hours, you may be charged undeservedly. Because of this, it’s vital to have thorough job descriptions outlining the commitment expected from the employee, and it’s important to track each employee’s attendance and hours.

3. The Unemployment Insurance Office Miscalculated Your Rate

Unemployment insurance rates are determined on an annual basis, and letters are sent out November 1 to alert business owners of their updated rates for the new year. Based on your number of claims and your previous rate, you should have an idea of whether your rate will increase or decrease, but it’s always a good idea to check with an accountant to make sure your adjusted rate is correct.

4. Your Accountant or Payroll Provider Miscalculated Your Rate

Even well-intentioned professionals can make mistakes. And oftentimes, when you own a new business, third parties may charge your company the highest rate when it should actually be lower. This is why it’s important to establish a dialogue with your accountant or payroll provider and be willing to discuss all aspects of your finances.

Keeping track of unemployment insurance shouldn’t be too difficult. Implementing simple procedures for documenting employees, and using performance reviews and corrective action notices will solve the majority of the problems.

And it’s never too late to set up procedures to lower your unemployment insurance rate. November is fast approaching, and every one of the four issues listed above has a fixable solution.

1. You Will Be Notified of Every Unemployment Claim by Your Employees

The trick is to respond to every notification, and there should be no exceptions. In the response, include all documentation associated with the employee. This documentation should include corrective notices, warnings and the final documentation of the fire, resignation or layoff.

2. If You Are Not the Chargeable Employer, Reference Your State Law

Each state has a different qualification for how long an employee needs to be employed before the individual can claim unemployment insurance. Your state’s unemployment insurance office can provide exact guidelines, but here are a few examples:

  • Texas: Each employee must have made 37 times the amount of benefits they are eligible for each week. Their amount of benefits are determined by the state using the number of dependent and weekly wages. In this case, the amount your employee made is the most significant factor.
  • New York: The employee must have earned at least 221 times minimum wage over three months.
  • Washington: The employee must have 680 hours of work.

3. If the Unemployment Insurance Office Made a Mistake, Contact Them as Soon as Possible

Like most other aspects of unemployment insurance, the exact number of days varies from state to state. In Illinois, for example, the period for protest is 15 days. However, the sooner a problem is identified and the unemployment office is notified, the better. Your new annual rate comes out on November 1. Any issues should be identified and dealt with immediately.

4. Always Double-Check Your Accountant or Payroll Provider’s Numbers

Mistakes happen quite frequently. Mike Cavanaugh, Co-CEO of the Small Business Advocacy Council and Principle at RCM Wealth Advisors, fell into this trap. He was curious why his unemployment rate was so high. Mike found out that his payroll service had been unsure of the numbers to use for the tax, so they resorted to charging his account the highest rate. The result: RCM overpaid upwards of $25,000. The good news is, in most states, if you overpay, you have a year to use the overpayment toward future payments or apply for a refund.

When an outside accountant handles your books and payroll, it’s a good idea to check with them to make sure you are being charged correctly. The relationship between HR and accounting is critical, so it’s important to get it right—especially for a new business.

To see my previous post on how to lower your unemployment insurance tax rate, click here.

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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