States, which need to repay the federal loans they took out to pay regular unemployment benefits, are slapping tax surcharges on experience-rated employers. Consequence: Your unemployment tax bill will increase, even if you didn’t lay off any employees.
However, if you’re willing to budget just a little bit more to pay so-called voluntary contributions, you may actually come out ahead, regardless of the shape of your state’s unemployment trust fund. But to know for sure, you’ll have to figure it out.
Good idea, or not? Paying voluntary contributions lowers your experience rate, which, in turn, lowers your tax rate. Whether voluntary contributions are a good strategy depends on your state’s experience-rating formula. Most states use the reserve-ratio method or benefit-ratio method to set experience rates.
In reserve-ratio states, contributions are credited to your state account; benefits are charged. To figure the ratio, taxes paid minus benefits charged is the numerator; average taxable payroll is the denominator. The result reflects a “banking” of experience.
The ratio in benefit-ratio states measures benefits charged against taxable payroll. Unlike the reserve ratio, there’s no balancing between taxes paid and benefits charged. To figure the benefit ratio, the numerator is benefits charged; the denominator is taxable payroll. Making a voluntary contribution wipes out the benefits charged to your account, dollar-for-dollar. There’s no experience banking, since only the latest year counts.
Ghost in the machine? The second consideration in deciding whether voluntary contributions will work is your company’s financial position and employment forecast.
In reserve-ratio states, a voluntary contribution made for the 2012 rate year raises your account balance and lowers your tax rate. Hitch: In 2013, voluntary contributions may backfire, since your account balance may be lower. Even so, if you need extra cash next year or anticipate a bad year because of layoffs, voluntary contributions may work. Since unemployment experience isn’t banked in benefit-ratio states, nothing comes back to haunt you.
Voluntary contributions are useful if you expect your payroll to increase in 2013; they may not be a good idea if your payroll will remain the same or decrease.
READ THE FINE PRINT: Some states limit voluntary contributions to employers with positive experience ratings. Your rate notice should tell you whether you can make these contributions, and should contain the data you need to determine whether contributions will pan out. In addition, some states have created online voluntary contribution calculators.