Whether a business chooses to outsource or handle payroll internally, successful HR departments have a firm hold on their payroll calculations, filings, and deposits. This process is simply a matter of withholding taxes based on IRS or state jurisdiction tables and getting that money and the corresponding report in on time. However, the rate that is provided by the Department of Labor and Employment for Unemployment Insurance is often overlooked as a way to control cost.
What is it?
Despite the name, Unemployment Insurance is actually an employer-paid payroll tax to fund unemployment benefits for employees that are laid off from their jobs through no fault of their own. The Colorado Department of Labor and Employment (CDLE) issues this tax rate around November for the following year’s wage activity. The rate is slightly determined by industry but is primarily a function of employer-specific conditions.
When the ‘rate notice’ is issued, an employer must use that rate to calculate the tax they owe on each employee for the ENTIRE year following the notice. In Colorado, an employer must contribute that tax rate on each employee until the employee makes $12,500 with the company in 2017; this chargeable wage limit continues to rise year after year. For example, an employer with 10 employees and an Unemployment Tax Rate of 1% will have to pay $1250/year towards their state unemployment tax (1% X $12500 X 10 Employees) – Not a big deal if you’re the owner of this business. But what if your rate was 10% leaving you with a $12,500 bill? Or if you’re an employer with 100 employees and a modest rate of 6%? You’re now looking at a $75,000 employer tax bill where each percentage point means $12,500 in your wallet.
The tax rate at which an employer must pay into UI is determined by industry, benefits that are charged to their account, and premiums paid into their account in the form of payroll tax. Industry rates are broken into four categories with ‘Non-Construction’ being the lowest rate and ‘Heavy Construction’ being the highest rate. Most businesses will fall into the ‘Non-Construction’ sector. The largest influence on rate comes from individual company employment history. Companies that have lost a number of unemployment claims and do not make large contributions will generally pay the highest tax rate.
How is it Calculated?
The formula that determines individual company rate is as follows: (Lifetime Total Premiums Paid minus Lifetime Total Benefits Paid)/Average Chargeable Payroll. This determines the percent of excess that the individual employer account is running. The percent of excess is then applied to a table that is updated by the CDLE to come up with the ‘Base Rate’. The ‘Base Rate’ is added to the ‘Bond Principal Rate’ to come up with the Combined Rate that is used to calculate the tax. Therefore, the more that an employer pays into this tax account, and the fewer claims that are charged to it, the lower their tax rate will be.
As such, the employer contribution and the claims become extremely important to manage as employee counts rise. Since the tax is capped, an employer pays into the account on every employee until the wage base limit is reached. This also applies to new hires in the middle of the year. Likewise, employers are not refunded for employees that leave in the middle of the year. For companies with high turnover, this becomes paramount in keeping money flowing to the bottom line.
What can we do about it?
So what can be done to manage and mitigate the impact of this payroll tax legislation? Every company needs to carefully review their unique situation in order to develop a sound strategy to keep their tax rate as low as possible. First, it is important to weigh the costs of employee turnover from a tax, training, and operations perspective. Anything that can be done to avoid the number of unemployment claims that come across HR’s desk will result in a lower tax percentage. When claims do arrive, it is important to fill out the forms accurately and have as much documentation as possible to support your case as hearsay scenarios rarely produce the results employers are looking for.
Another controllable option is to make voluntary tax payments (yes, you read that correctly). Voluntary payments may seem counter-intuitive to lowering your tax rate, but if done correctly, they can actually result in an employer paying less over the course of a year or multiple years. By executing this strategy, an employer can effectively increase the Lifetime Total Premiums Paid which will manipulate the percent of excess equation. Depending on individual circumstances, this can actually lower the total annual payment towards the UI Tax.
The average employer has little control over this legislation, but they have a great deal of control over how they interact with it. If you’re not going to be able to change the rules, you might as well do the best you can to play by them effectively. As Robert Kiyosaki said, “It’s not about how much money you make, it’s about how much money you keep.”
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