States Offer Variety of Methods to Reduce Unemployment Tax Rates

Voluntary contributions, joint accounts, and state-specific elections can reduce an employer’s state unemployment taxes, but they are not always worth the cost, an unemployment tax expert explained May 16.

Each of these three options can benefit employers but come with either an upfront cost or high unemployment tax rates for a short period of time, said Tom Towson, managing director for employment tax consulting at Equifax Workforce Solutions. The juice is not always worth the squeeze, and Towson said employers should assess whether any of these methods will result in cost savings.

This is especially the case with voluntary contributions, which are allowed in 26 states, Towson said. These are extra tax contributions to the state that could lower an employer’s unemployment tax rate by either increasing the employer’s reserve balance or decreasing its benefit charges in its state unemployment account, he explained during PayrollOrg’s 43rd Payroll Congress in Kissimmee, Florida.

The amount needed to lower a tax rate is not the same for all employers, Towson said. Even if two employers had the same tax rate, one employer might only need to pay a minimal voluntary contribution to have its rate reduced, while the other might need to pay magnitudes more for the same result, he said.

Towson recommended that before making a voluntary contribution, employers should conduct an analysis to determine if the amount of payment needed exceeds the estimated amount of tax that would be saved under the reduced rate. If so, no voluntary contribution should be made.

Like voluntary contributions, joint accounts present an opportunity for employers to reduce their state unemployment tax rates, Towson said. This method is only useful for employers with multiple legal entities in a state that each have their own unemployment tax rate, he said.

“If you were to look at each [entity] and, for rating purposes only, combine [them] together, what would your rate look like then?” Towson said. “Our ultimate goal is to get a lower rate for all of the members that elect to participate in that joint account.”

Calculating the financial benefits of a joint account requires combining the unemployment experience of different legal entities, Towson said. Some combinations might result in cost savings, while others would lead to unnecessary expenditures, he said. Employers must consider factors like each entity’s taxable payroll and tax rate, as well as the expected joint account tax rate, before making an election, he said.

Many states offer voluntary contributions or joint accounts, but a select few, including Alaska, Arkansas, Kansas, New York, and Pennsylvania, provide state-specific elections that either lower unemployment tax rates or offer the possibility of long-term unemployment tax savings, Towson said.

"[The state-specific methods] are detailed, and the accountant in me does this, but I do want you to know about these strategies because they can save your organization money,” he said.

Some of these methods, such as in Alaska and Arkansas, add wrinkles to their normal tax rates calculations to benefit employers under certain circumstances, Towson said. Others, like in Kansas and Pennsylvania, offer long-term relief to employers with high unemployment tax rates, with a tradeoff of paying the maximum state unemployment tax rate in the meantime.

“I’ve never seen an employer say ‘give me the max rate for three years,’ but there are certain situations where it very well may be something you want to do,” Towson said.