Experience Rating In Unemployment Insurance
Experience is a good thing, right? Not necessarily. When it comes to an employer's unemployment tax burden, experience can quickly become a double-edged sword. Here's everything your small business needs to know about an experience rating in unemployment insurance.
In the US, unemployment benefits are handled by states.
When an employee is laid-off or experiences an unemployment event, he can apply for benefits that are paid directly from the state's unemployment fund.
State payment of unemployment benefits camouflages the fact that unemployment benefits are actually paid by employers. The funds that fill the state's unemployment coffers are there because the state has collected unemployment taxes from employers.
An over-simplified view of the unemployment tax system is that employers are required to pay into the system the amount of benefits their workers have withdrawn plus an additional amount that covers unfunded portions of the state unemployment benefits program. The way this is achieved is through the application of a state unemployment tax that is based on how often the company's workers have tapped into unemployment benefits.
The amount of tax each employer is required to pay is determined by something the state calls your "experience rating". The higher your experience rating, the more tax you will be expected to pay for each of your employees.
Experience ratings vary based on the employer's experience with unemployment. It is rooted in the idea that the cost of unemployment compensation should be indexed to the amount of involuntary unemployment experienced by each company's employees.
At the present time, there are four different formulas states use to determine employers' experience ratings. But you should know that if the amount of benefits your workers have received over the past five years exceeds the amount of unemployment you have paid, your experience rating (and your current unemployment tax amount) will be significantly higher.
The bottom line is that when it comes to experience ratings it's in your best interest to minimize the amount of benefits that are distributed to your workers.
Unfortunately experience ratings aren't the only factor that determine the amount of unemployment tax your business will be expected to pay. For-profit ventures are also expected to pay a social-cost tax. These funds are used (a) to cover the unemployment benefits that can't be assigned to a specific employer and (b) to create a buffer that can be used during periods when the national unemployment rate skyrockets.
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What's your take on employer employment tax experience ratings? We welcome your questions, comments and advice.