It is summertime and most of us are waiting for our vacations to arrive so we can spend time at the beach or in the mountains. But there may be some of you who are anxiously awaiting the annual unemployment tax rate notices several states mail at this time of the year. That’s right, mid-year tax rates. Only four states follow that procedure, and they are New Hampshire, New Jersey, Tennessee, and Vermont. The period of their tax rate is from July 1 of each year through June 30th of the following year.
Each of these states has its own regulations for administering and calculating their unemployment tax rate, which may not surprise you if you have been in the industry for any length of time. Here is a state-by-state breakdown of what to expect with each of these four states and last year’s rate factors since the factors for the upcoming year have not yet been released.
| New Hampshire | |
| Date of Issuance: | End of August |
| Type of Calculation: | Reserve Ratio |
| Voluntary Contribution Opportunity: | No |
| Joint Account Opportunity: | No |
| Tax Rate Range: | 0.10% to 7.00% |
This state uses a three-year historical review of your taxable payroll, taxes paid in, and benefits paid out. For the upcoming year, the period would be calendar year 2021, 2022 and 2023. The calculation is the three-year average of the Annual Taxable Wages divided by the Reserve which produces a percentage that is applied to a rate table to identify your actual tax rate for the upcoming 12 months.
Your tax rate will have a breakdown of each year’s figures for each of the three categories mentioned above. This is helpful because you are then able to audit the figures and compare them to what you know was filed and the totals from the benefit charge statements previously received from the state agency. If you find valid discrepancies that impact your tax rate negatively, you have an option to protest the tax rate and request a review. As part of your protest, you should include specifics on what factors and figures you believe are in error.
| New Jersey | |
| Date of Issuance: | Mid to late August |
| Type of Calculation: | Reserve Ratio |
| Voluntary Contribution Opportunity: | Yes |
| Joint Account Opportunity: | Yes |
| Tax Rate Range: | 1.20% to 7.00% |
In this state, you have a couple of options for reducing your unemployment tax rate in the coming year or years, depending on the option. Like New Hampshire, New Jersey also uses a reserve ratio calculation to determine tax rates. One difference between them is the figures used. For example, New Jersey uses all taxes paid by the employer, EVER. The same is true for the benefits charged. The taxable payroll factor is either a three- or five-year average. Both are displayed on the tax rate but only one is used. You also have the option to audit the figures and protest any discrepancies discovered. Again, evidence of this is necessary when crafting your protest letter.
One advantageous option for employers in New Jersey is to make a voluntary contribution (VC). A VC is a prepayment of taxes made at the issuance of the rate to change the factors, so the result is a lower rate for the year. Of course, one must determine if it makes good fiscal sense to do so. To simplify, if an employer can make a VC of $5,000 and nets $25,000, that may be a lucrative investment. The “net” amount is what you end up with when subtracting the VC amount from the savings. If the savings are negative when you do that calculation, it is unadvisable to make a VC for that upcoming year. It is a one-year lock-in so it has little risk. There is an assigned deadline for making the prepayment VC so adherence to that is crucial to make sure a lower rate is secured. If the deadline is missed, there is no recourse.
On the other hand, there is a joint account opportunity as well. A joint account is a tax rate that is calculated using the figures from multiple legal entities active in the state. To be eligible to form a joint account, an employer must have more than one active legal entity in the state. There are other parameters as well. For example, none of the legal entities may have a new employer rate. By combining the figures, a rate is calculated. An employer must then add up the taxes that would be paid at each legal entity’s assigned rate and compare that to the taxes paid at the projected joint account rate.
To better clarify that, let’s use an example. Company A has operations in the state of New Jersey but also has two sister companies active in the state as well; Company B and Company C. They are all related through common ownership, management or control. Company B has a rather high tax rate while companies A and C have much lower rates. A joint account could be formed using all three of the companies or only two of them. The arbitrary rates for each of these companies are as follows;
Company A – 0.10%
Company B – 2.70%
Company C – 0.10%
Company B could potentially take advantage of either both or just one of the much lower rates of its sister companies. Like a VC, formal application must be made and completed within the time frame established by law. There’s a potential pitfall to this option, however. Once applied for and approved, the joint account must remain in existence for three years so when calculating it an employer must be aware of their company’s plans for the next three years. Any corporate structure changes could impact the results negatively so this should be considered before applying for a joint account in this state.
| Tennessee | |
| Date of Issuance: | Late August |
| Type of Calculation: | Reserve Ratio |
| Voluntary Contribution Opportunity: | No |
| Joint Account Opportunity: | No |
| Tax Rate Range: | 0.01% to 10.00% |
With no rate buy-down options, this state is similar to New Hampshire. It also uses a three-year historical review of taxable payroll but only the most recent year of taxes paid in and benefit charges paid out. It is always recommended these figures and factors are audited and validated to ensure no tax overpayment occurs. Similar to other states in this overview, a protest may be filed within the statutory guidelines.
| Vermont | |
| Date of Issuance: | Late June |
| Type of Calculation: | Benefit Ratio |
| Voluntary Contribution Opportunity: | No |
| Joint Account Opportunity: | No |
| Tax Rate Range: | 0.40% to 5.40% |
Vermont is the first of these four states to mail its annual unemployment tax rate to employers. It uses a benefit ratio calculation rather than a reserve like the other three. This means a ratio is derived by dividing the benefit charges by a taxable payroll factor. For this state, the total of the last three years of benefits charged and taxable payroll reported are used. There are no buy-down options in this state so the rate you receive is the rate at which you would pay taxes.
The unemployment tax rate is affected by varying factors, not the least of which is unemployment claims. Since employers generally pay most of the tax, with the exception of a just a few states where the claimants also pay a small percentage, it is important for employers to protest all unemployment claims that have a protestable separation reason. Then, it is equally important to audit the benefit charge statements the state agencies mail out; some are weekly, others are monthly, quarterly or even annually. When these documents are received employers should review each week of benefits paid because it is possible there are errors. The more claims paid out of an employer’s account, the likelihood the tax rate will creep up each year until they are at the maximum tax rate.
Payroll taxes are inevitable and unemployment tax is considered one of those taxes. However, it is controllable if employers take the time to properly manage their unemployment claims program and their tax accounts, especially if they do business in a state that offers additional tax reduction options. If you are unsure of how to best administer this program, contact us for a quote on how much we can save you in unemployment taxes and claim costs.