December 30, 2019 Taxes en_US Unemployment insurance tax is the only tax you can control through sound business practices. Learn about managing your unemployment insurance rate. https://quickbooks.intuit.com/cas/dam/IMAGE/A42J2rc1k/07f1899691f792f459042d139961fd3a.jpg https://quickbooks.intuit.com/r/taxes/how-new-businesses-can-minimize-their-unemployment-insurance-tax-rates/ How new businesses can minimize their unemployment insurance tax rates
Taxes

How new businesses can minimize their unemployment insurance tax rates

By Ken Boyd December 30, 2019

A few simple actions can save you hundreds of dollars in your new entrepreneurial venture. If you manage a staff, for example, you can take steps to reduce your unemployment insurance tax liability.

A state’s unemployment insurance tax rates are a mystery to most new business owners, but your actions can reduce the tax rate. By implementing a few procedures early on, you can save thousands of dollars each year.

Here’s how your business can reduce your unemployment tax rate.

First, a few words about the basic math

Unemployment taxes are calculated on each worker’s taxable wage base, and the tax rate schedule is determined by your state. State UI taxes are calculated by multiplying the taxable payroll by the state tax rate.

In Missouri, for example, the state unemployment insurance program assigns each new employer a new employer rate. Employer tax rates are set based on an industry classification. If a particular industry has a high level of unemployment claims, the new business UI tax rate will be relatively high.

After several years, Missouri assigns an experience rating to the employer’s account. The UI tax is based on the dollar amount of payroll, unemployment benefits paid to former employees, and the firm’s voluntary payments into the state unemployment trust fund.

You can reduce your state unemployment tax by lowering your rate of employee turnover, and by minimizing the number of former employees who file for unemployment benefit payments during the calendar year.

Here are more details on lowering your unemployment insurance contribution rate.

How to lower your unemployment tax rate

You can control your maximum tax rate by effectively managing unemployment claims filed by former employees. Unemployment claims against your employer account occur when:

  1. You downsize your company and lay off employees. Unemployment insurance is designed to pay benefits to workers who are laid off.
  2. You terminate an employee for valid reasons, but the employee is able to collect unemployment insurance. This occurs when the worker files a claim, and the employer doesn’t have sufficient documentation to prove the dismissal was for a valid reason.
  3. An employee quits, and they collect unemployment insurance because you have no documentation to prove they quit.

A large percentage of disputed unemployment claims are lost by employers due to a lack of valid documentation. You can avoid this problem by maintaining accurate wage reports, and other documentation.

To control your rate each fiscal year, a new business must:

  1. Create job descriptions for employees. Employers and employees must have a written understanding of expectations. When expectations are not met, you have proof the employee was aware of expected work behaviors.
  2. Have employees sign job descriptions or an employee handbook. You must have proof that the employee agreed to and understood acceptable workplace behaviors.
  3. 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).
  4. Employee performance reviews. Every employee review should be based on the employee’s job description.
  5. Terminate for cause based on the job description. If a critical task in the job description is not being consistently followed, you may have grounds for a valid termination.
  6. Have an explicit statement from employees who quit. Insist on a resignation letter, or have a process in place to manage this critical process.
  7. Deny claims promptly. You should deliver documentation to the state with claim-denial forms promptly. Use the proper account number when you file with the state department of labor. Taking this type of action can result in unemployment benefit changes, and your tax rate may not increase.
  8. Closely monitor the unemployment insurance tax rate. Analyze your claims, total payroll, and your tax rate for all calendar quarters. If you build a history of minimal unemployment claims, your tax rate should decrease.

The most important factor to protect your business from false claims is consistency. When all of your employees receive corrective action notices for violating company policies, or not complying with the terms of their job descriptions, you have a good chance of denying spurious unemployment claims.

Your business must comply with a number of federal laws and regulations, including equal opportunity employer requirements.

Businesses also pay a federal tax to fund the federal unemployment insurance program.

How FUTA works

The Federal Unemployment Tax Act (FUTA) assesses a tax to fund unemployment benefits at the federal level. Employers complete IRS Form 940 to calculate FUTA taxes. The current FUTA tax is 6% of the first $7,000 earned by each worker.

If you pay into a state unemployment insurance program, you can take a 5.4% credit and apply it to your FUTA tax. Your FUTA tax after taking the credit is 0.06%.

So, where do you go from here?

Manage your risks

The cost of unemployment insurance can be managed, if you put some procedures in place.

  • Write formal job descriptions
  • Give annual performance reviews, and ask the employee to sign the review
  • Keep detailed records of your reviews, and other evaluations
  • If a former employee files a claim for unemployment that you believe isn’t valid, use your records to contest the claim
  • Make your state and federal unemployment payments on time to avoid interest and penalties

If you implement this plan of action, your insurance claims and tax rates will be lower. Then, you can invest those extra dollars to grow your business.

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Ken Boyd is the Co-Founder of Accountinged.com, and owns St. Louis Test Preparation (accountingaccidentally.com). He provides blogs, videos and speaking services on accounting and finance. Ken is the author of four Dummies books, including Cost Accounting for Dummies. Read more