Basic Tips Help Avoid Higher State Unemployment Taxes

The recession has hit our states hard. From Arizona to Maine and all points in between, state governments are under extreme pressure to cut costs and fund their budgets.
Why are the states feeling so taxed? For one reason, with unemployment rates in double digits across much of the country, states’ unemployment insurance funds are depleted as workers have relied on unemployment checks to pay bills and provide for their families. In fact, the majority of states have been forced to borrow money from the federal government to continue to extend those benefits.

The State Unemployment Tax Authority is the tax levied on employers to help finance the state’s unemployment insurance fund. Over the past few years, state unemployment tax rates have steadily increased, and those rates could continue to climb as states look to employers to help them replenish their funds’ coffers and repay the federal government.

Certainly, taxes are one of life’s constants, but employers have power to influence their unemployment tax rate and manage their annual tax expense. Here are a few tips:

• Employ good hiring practices — Unemployment tax rates, like insurance rates, are determined in part by the amount of unemployment claims filed by an employer’s former employees. So if a business can build a history of few claims, it may be able to reduce its unemployment tax rate. Smart hiring practices, including prehire skills’ assessments, character screenings, drug tests and thorough background checks, can help employers identify qualified candidates who are less likely to be let go in the future.
• Minimize turnover — Because unemployment taxes are pay-as-you-earn, Texas employers pay unemployment taxes on the first $9,000 a worker is paid during a calendar year. If one person holds a position for the entire year, the employer only pays taxes on the first $9,000 that individual earned. However, if three different people rotate through the same position over the course of a year, the employer will have to pay unemployment taxes on the first $9,000 each of what the three workers earn, or on $27,000. That is a significant expense that can be more effectively managed with careful hiring decisions.
• Manage terminations effectively — If termination becomes necessary, conducting regular performance evaluations and having in place step-by-step probationary procedures to help correct poor performance can mitigate wrongful termination claims — for which an employee would be eligible to receive unemployment benefits — by substantiating the rationale for the employee’s termination.
• Contest illegitimate claims — When a worker’s job is eliminated, he or she has a legitimate unemployment claim. However, if a worker chooses to resign or is terminated for cause, such as violating a company policy, he or she becomes ineligible for state unemployment. Regardless, a worker may still attempt to claim unemployment benefits, and, if so, it is up to the employer to contest such claims. This is why thoroughly documenting the cause and events surrounding a termination is so important. Remember too, even if the state initially rejects an unemployment claim, the terminated worker can file an appeal. Employers, therefore, must remain diligent and continually monitor the process until the claim is resolved.
• Diligently audit statements — In an effort to process countless claims, state workers frequently make clerical errors, assigning unemployment claims to the wrong employer or charging employers for workers’ claims that have been disputed and rejected. Employers must audit the benefit charge statements they receive from the state to ensure that the claims they are assigned are in fact legitimate.

As employers try to regain their balance after what has been a rough economic bout for many businesses, it is unfortunate that they are hit with further financial blows in the form of higher taxes. Until workers can get back to work, however, the need for businesses to contribute more to their respective state’s unemployment insurance funds will be unavoidable. If business owners are smart, they will employ strategies to help them manage their tax rates even if they aren’t quite ready to employ new workers.

JOHN ALLEN is president and COO of Houston-based G&A Partners. For more information visit www.gnapartners.com.