Minimizing Employer Unemployment Taxes
As a cost-conscious small business employer, the last thing you need is a high unemployment tax burden. The reality is that many employers pay a lot of unnecessary employment taxes. When every penny counts, these tips for minimizing unemployment payroll taxes could save you a bundle.
You can't avoid paying unemployment taxes.
Although unemployment benefits are administered by the state, the cost of your workers' benefits is your responsibility. The more benefits your workers receive, the more tax you are expected to pay–that's just how the system works.
But even though you can't duck unemployment taxes altogether, you can limit the amount of unemployment taxes you have to pay. Your company's unemployment tax burden is based on something the government calls your "experience rating". Businesses whose employees receive more unemployment benefits are given a higher experience rating (and unemployment tax burden) than the companies whose workers rarely receive benefits.
Ultimately, it's in your best interest to manage and reduce the amount of paid unemployment benefits that can be traced back to your company. Here's how you can do it and still stay on the government's good side.
- Understand eligibility requirements. Unemployed workers are not automatically eligible for unemployment benefits. In most states, unemployment benefits are limited to individuals who have been laid off due to lack of work, time reductions, or reasons not related to on-the-job misconduct. The distribution of benefits for any other reason will eventually result in the payment of unnecessary taxes.
- Keep meticulous personnel records. If an employee is terminated with cause, they're not eligible for unemployment benefits. The problem is that many small business employers have personnel records that are incomplete and incapable of documenting a case for termination. Instead, they simply lay off the employee and allow them to collect benefits.
- Respond promptly to requests. State unemployment agencies contact both the employer and the laid-off employee for information before they process a benefits request. If you fail to respond to a request in a timely manner, the state will base its decision exclusively on the information provided by your laid-off (and alienated) employee.
- Pay on time. Many small business employers don't know that late unemployment tax payments can influence the amount of taxes they pay. Delinquent payments and reporting can restrict your ability to earn a lower experience rating in subsequent tax periods.
- Report fraud. Do you know what constitutes unemployment fraud? You should, especially since fraudulent unemployment claims have a direct bearing on the amount of unemployment tax your company will pay in the future. Monitor your workforce and immediately report fraudulent behavior.
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