Employers Have Many Ways to Reduce State Unemployment Tax Rates

Employers can reduce their state unemployment insurance tax rates through voluntary contributions, joint accounts, or a handful of state-specific elections, two employment tax experts said May 16.

State unemployment tax rates have been rising in recent years due to the effects of the Covid-19 pandemic, and strategies for employers to reduce their tax rates can save a lot of money in the coming years, said Thomas Towson, an employment tax managing director for Equifax Workforce Solutions.

“Unemployment tax strategies become much more important when you’re in a period of increasing employment tax rates,” he said at the 41st Payroll Congress. “When rates are fairly low, it’s not quite as important, although there still can be some savings.”

Employers can reduce their tax rates through voluntary contributions, which 26 states currently allow, he said. Voluntary contributions are additional unemployment insurance payments made within a specified time frame. A voluntary contribution increases an employer’s reserve ratio in states that use the reserve-ratio method to calculate rates. It reduces an employer’s benefit ratio in states that use the benefit-ratio method to calculate rates.

Most states that allow voluntary contributions calculate the amount for employers and include it on their tax rate notices, added Rori Carney, a director for Equifax Workforce Solutions.

It generally makes sense for employers to use voluntary contributions if a slight increase in their reserve ratios or decrease in their benefit ratios would place them in a lower tax bracket, Towson said. However, if an employer has a liability on its unemployment insurance account, the state will apply the contribution toward the outstanding balance, which would most likely result in the employer’s tax rate remaining unchanged.

In New York, employers may lower their tax rates in certain instances by making voluntary payments similar to voluntary contributions, Carney added. If an employer has a negative account balance that exceeds 21% of its taxable payroll for the preceding year, New York will charge the amount in excess of 21% to the state’s general account fund and assign the maximum tax rate to the employer for the following three years. However, employers can voluntarily repay the amount charged to the state to avoid the maximum rate.

Another state, Alaska, also allows employers to make elections to reduce their unemployment tax rates, Towson said. Alaska is one of the few states that does not use the benefit-ratio or reserve-ratio methods to calculate tax rates. Instead, the state bases calculations on the percentage change in an employer’s gross wages from quarter to quarter, with quarterly declines generally resulting in higher tax rates. Nevertheless, employers may elect to apportion or delete wage payments in a quarter under qualified circumstances. This can result in a smaller average quarterly decline, which can lead to a lower tax rate.

Additionally, 11 states give employers the option of creating a joint account, which combines the experience rate for two or more employers to create a single “blended” tax rate applicable to all the participants, Carney said. Joint accounts do not change the organizational structure of the employers, and each party must generally continue to file their own quarterly tax reports with their specific state unemployment insurance account numbers.

“There are usually ownership provisions, but a state like New York allows joint employers as long as the employers work in a similar industry,” she said. “However, most states require 51% shared ownership.”

Under a joint account, employers risk having their tax rates determined based on the actions of other employers in the joint account, warned Towson. Similarly, some employers with joint account will inevitably have a higher tax rate than otherwise because of the experience rate of other employers in the account.

Each strategy to reduce state unemployment taxes has risks or drawbacks, and employers should perform a cost-benefit analysis and consider any anticipated organizational changes, Towson said. Doing so will help employers decide which strategy to use and how much they can expect in future tax savings.