September 11, 2015 Taxes en_US Unemployment insurance tax is the only tax you can control through sound business practices. Learn about managing your unemployment insurance rate. How New Businesses Can Minimize Their Unemployment Insurance Tax Rates

How New Businesses Can Minimize Their Unemployment Insurance Tax Rates

By QuickBooks September 11, 2015

A few simple actions can save you hundreds of dollars per employee each year in your new entrepreneurial venture.

Your state’s unemployment insurance tax is a mystery to most new business owners. But it’s the only tax rate you have control over. By implementing a few procedures early on, you could save hundreds of dollars per employee every year.

Here’s how your business can take control of the only tax you can lower through better business practices.

First, a Few Words About the Basic Math

Unemployment taxes are calculated on “base wages.” These are set by your state. Then, each state decides on a “multiplier” as a “percent” of tax applied to those base wages.

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 is what you can control and use to lower your taxes. The more unemployment claims former employees successfully make, the higher the multiplier will be for your business. The range of rates for a 10-person company vary greatly based on your company’s history.

Continuing our 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%. Just at a glance, you can see how paying a rate based on a multiplier of .55% rather than 8.15% can save your business real money.

How to Control and Lower Your Unemployment Tax Rate

As a new business, you 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 way up. It only goes up, however, if you have successful unemployment claims against your company.

As such, you can control your tax rate by effectively managing unemployment claims by your former employees. Unemployment claims against your company occur when:

  1. You downsize your company and lay off employees. This is what unemployment insurance is designed for.
  2. You terminate an employee for valid reasons, but the employee is able to collect unemployment insurance by filing a claim because you have no documentation to prove the dismissal was for those valid reasons.
  3. An employee quits, and they collect unemployment insurance because you have no documentation to prove they quit.

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 your rate, a new business must:

  1. Create job descriptions for employees. Employers and employees must have a written understanding of expectations. Thus, when expectations are not met, you, the employer, have proof the employee was aware of expected work behaviors. For a simple way to quickly create job descriptions, see our job description wizard.
  2. Have employees sign job descriptions or employee handbooks. 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. Review employees. The best reviews are based on the employee’s job description.
  5. Terminate for cause based on the job description. This can also be applied to the employee handbook.
  6. Have an explicit statement from employees who quit. Insist on a resignation letter, or have a process in place.
  7. Deny claims promptly. You should also deliver documentation with the claim-denial forms.
  8. Closely monitor the unemployment insurance tax rate. Following the initial three years with no claims, the tax rate should decrease substantially.

Valid documentation includes providing employees’ performance reviews and corrective action notices on a regular basis. The No. 1 factor that will help 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.

At the end of your three years, you will receive a new rate from your state unemployment office. If you have no claims against your company, the rate will go down for the next year. If you have a high level of claims, the rate will go up. Check with your accountant or your 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 notices. As a result, your claims and tax rates will be lower. Then, you can keep those extra dollars to grow your business.


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