Taxes and fees associated with employee payroll can really add up. Most charges are assessed at predetermined rates, which leaves you feeling defenseless to change them.
But fear not, your unemployment tax rates!
Since the employer, not the employee, is responsible for paying both federal and state unemployment taxes, lowering your rate has a real and immediate effect on profitability. Below, we offer insight into how you can positively impact your State and Federal Unemployment Tax rates.
What is Federal Unemployment Tax (FUTA) and State Unemployment Tax (SUTA)?
First, a little something for the history buffs:
The Federal Unemployment Tax Act (FUTA) was passed in the late 1930s after massive loss of jobs and countless American families were left destitute as a result of The Depression. The US Government passed the act as a way to help close the financial gap for workers who have lost their employment. Current-day business owners who pay employees more than $1,500 per quarter are still required to pay into the Federal tax fund up to the first $7,000 of the employee’s total pay for the year.
Following suit, the majority of US states enacted their own State Unemployment Tax Act (SUTA). Massachusetts’ SUTA tax maximum is one of the highest in the country at 11.4% on the first $15,000, much like Arizona where the rate is to 14.03%, but on only the first $8,000. State maximum rates and salary caps vary greatly across the country to coincide with the variance in unemployment rates and income levels.
Driving Down Your Federal and State Unemployment Tax Rate
Your state unemployment tax obligation is actually an opportunity to reduce your Federal rate. If you are required to pay SUTA tax in your state, you can reduce your 6.0% FUTA tax by up to 5.4%, bringing your FUTA tax rate down to 0.6%, or $42.00 per employee. ($7,000 * 0.006 = $42.00).
Pay State Unemployment Tax On Time
The caveat for earning the 5.4% reduction on the Federal Unemployment tax is paying your SUTA tax on time. Working with a professional payroll processing company, like Valor Payroll Solutions, will ensure your tax is remitted on time and you remain eligible for the huge reduction.
With some states charging double-digit rates, making a concerted effort to reduce your SUTA tax rate could have a significant impact on your costs. States take several factors into consideration when setting individual company rates, but we’ve highlighted the top five steps you can add to your human resource management strategy to see savings from your state SUTA rate.
Maintain Low Turnover Rates
Widely known as a high cost activity, high employee turnover can also impact your state unemployment tax rate. Not only are you required to pay the SUTA tax on the first $7,000-$68,500 (WA), but an increase in unemployment claims also impacts the amount you’ll need to pay in.
Other ways to improve employee retention are:
- Perform thorough interviews and assessments to ensure fit and experience
- Set up training programs that foster employee growth
- Maintain regular communication with employees to keep the engaged and informed
- Offer opportunities to enjoy social events with fellow teammates
- Compare your benefits package versus competing companies. Time off is a particularly valuable area for the incoming workforce.
Strategic Hiring Practices
As with turnover, how quickly you staff-up can have a tremendous impact on your state unemployment rate. If you staff up too quickly, say for a growth project or seasonal volume increases, only to then lay off a portion of those employees, you’ll see an increase in your claims. Your state tracks the amount of claims they’ve paid out versus how much you’ve paid in each quarter. If they’ve paid out more than you’ve paid into the fund, you will be charged a higher rate the following year to make up for that variance.
Utilize The Lower Rates From A Merger or Acquisition
If your company has recently merged or acquired another company whose unemployment rate is lower, you may be eligible to use that rate for the entire holding. Contact your local unemployment agency to discuss combining fund balances and rates.
Audit Your Payroll Tax Statements
Even government agencies can make mistakes! Review your unemployment statement thoroughly to ensure the amounts and rates align. Not sure if it’s correct? Valor Payroll Solutions team of experts can audit your unemployment statement and give you peace of mind that you are paying the correct rates.
Classify Your Workforce Correctly
The chance of a contractor who has been misclassified applying for benefits might be less common, but it still impacts more than just your unemployment rates. The contractor could be awarded benefits, and you could be penalized for not paying the appropriate employment taxes for both State and Federal obligations due to the incorrect classification. Review our article Employee or Contractor? to understand how to correctly classify your workforce.
A Payroll Team That Has Your Back
It goes without saying that there are many, many taxes and fees that come with processing payroll. It can be hard to keep them straight! The good news is you have an opportunity to control your Unemployment Tax rates with small changes that have a broader reach than just payroll taxes. The Valor Payroll Solutions experts are here to be your partner in managing unemployment tax and all your payroll needs. Book a call today to see how we take the weight of payroll compliance off your shoulders and let you focus on what you do best!
