It's easy to regard unemployment taxes, whether federal or state, as fixed costs. But you may be able to control these costs and other claims-related expenses more than you might think. Let's explore some practical strategies for doing just that.
Employers are commonly urged to strengthen employee retention. And for good reason: Unemployment tax payments — particularly at the state level — are partially based on the number of employees who file unemployment claims. So, lowering avoidable turnover may help reduce claims activity. Take a continuous-improvement approach, which may include:
That last point is especially important. Generally, workers qualify for unemployment benefits only if they lost their jobs through no fault of their own. But in some cases, even when an employer argues that an employee was fired for poor performance, the worker may win an unemployment claim if the hearing officer finds that the organization didn't provide enough training or provided the wrong kind of training.
Of course, you may encounter situations where you must terminate an employee. In such cases, consider whether severance and outplacement benefits could help mitigate unemployment costs. Depending on state law, severance may affect the timing or amount of unemployment benefits in your favor. And outplacement services that assist claimants in finding new jobs can sometimes shorten the duration of unemployment benefits.
Approach layoffs with caution. These can be particularly onerous from an unemployment cost perspective because, as mentioned, payments are partly based on the number of employee claims. Layoffs carry other risks as well. For example, recent research from Careerminds, a global workforce solutions provider, found that it took employers an average of 7.2 months to fully recover workplace culture following a layoff.
If your organization's staffing needs fluctuate, look into engaging a temporary staffing agency to meet short-term labor needs. Doing so may help you avoid the time and cost of hiring employees only to later lay them off when business slows.
Naturally, your HR and payroll staff should be well-trained and regularly updated on all compliance matters related to unemployment taxes and benefits. At the federal level, an employer is generally subject to the Federal Unemployment Tax Act (FUTA) if it:
Employers are required to pay FUTA tax on the first $7,000 of applicable wages paid to each employee during the calendar year. The rate is 6%, but it can be decreased with a credit that allows eligible employers to pay an effective FUTA tax rate of 0.6%. However, the effective rate may be higher if state unemployment taxes aren't paid in full and on time or if the employer paid applicable wages in a credit-reduction state.
Indeed, eligibility for unemployment benefits and the tax impact of claims are largely determined by the laws and rules of the state in which you operate. Thus, monitoring them closely can reveal helpful strategies.
For instance, some states allow employers to "buy down" (proactively manage) their unemployment insurance costs. Essentially, this means that employers can make a voluntary contribution to their state unemployment accounts to improve their reserve balances and potentially reduce their assigned state unemployment tax rates.
In states where this is permitted, employers with an assigned experience rating and benefit charges from previous claims may consider whether a voluntary contribution could lower future tax costs. Deadlines, calculations and surcharges vary by state. So, if this is an option for your organization, compare the contribution cost with projected tax savings and the cash flow impact before making a payment.
Unemployment taxes and other related costs are virtually unavoidable for employers. But as with any other expense, you can develop strategies to track, manage and potentially even reduce them. Contact us for help evaluating how payroll, tax and workforce planning can reduce unemployment tax exposure and support your organization's broader financial performance.
Get in touch today and find out how we can help you meet your objectives.
