ETS Tax Intelligence: Forecasting SUI Tax Rates
For most employers, state unemployment insurance (“SUI”) tax rates are generally cyclical. As demonstrated by the graph, national average SUI tax rates trend downward during a period of economic growth and trend upward following a period of economic downturn (as was the case with the “Great Recession”). However, trends are not always exact and are influenced by many factors. Employers can still be caught off guard when SUI tax rate notices are issued, such as in 2014 when average rates bucked the trend with a slight uptick. Unforeseen fluctuations can lead to unexpected cash outlays or over budgeting.
A prudent method for preventing surprises is to forecast SUI tax rates and associated tax costs. SUI rate forecasts utilize employer-specific factors, state merit rating factors, and the latest economic and legislative changes to estimate an employer’s future SUI tax rates/costs. The following outlines some of the situations where SUI tax rate forecasting can prevent unexpected outcomes:
- Change in SUI Tax Rate Calculations – State unemployment trust fund solvency remains the number one reason SUI tax rates have remained higher than pre-recessionary periods. Solvency is not simply measured by borrowings from the federal government or the bond markets but is also measured by the level of reserves necessary to pay on-going unemployment benefits and to sustain another recession. States modify their rating calculations each year in anticipation of future needs.
- Fluctuations in Workforce – Taxable payroll and benefit charges have a significant impact on the assignment of SUI tax rates. When there has been a significant change in these factors (such as the opening of a new location, increased hiring, or a reduction in force) rate forecasts assist employers in understanding the impact such changes may have on their SUI tax rates.
- Emerging from a Newly Liable Employer to a Merit Rated Employer – When an entity first begins operations in a state, they typically receive a “non-merit rate” (a/k/a “new employer rate”). This rate must be used by the employer for a specified duration (ranging from one to four years), depending on the state. Since the move from a “new employer rate” to a “merit rate” can result in a significant increase in tax costs, rate forecasting can be a valuable practice to identify such potential risk.
- Mergers and Acquisitions (“M&A”) – Prior to or following the completion of an M&A transaction (including internal employee reorganizations), a rate impact analysis (i.e., a rate forecast based on combining multiple employers’ unemployment experience) can avoid unexpected outcomes when the state workforce agencies issue revised tax rates. It often takes months, sometimes more than a year, for state workforce agencies to process the compliance paperwork and issue revised tax rates which can leave employers with large unexpected tax costs. Budgeting and accruing for these tax costs can reduce the financial burden when the tax liabilities become due.
Through utilization of client-specific data and a deep understanding of each state’s merit rating system, Equifax assists employers in understanding WHAT to expect from state unemployment tax costs in 2016 and WHY such changes are occurring. For more information on how Equifax can assist your organization in forecasting future SUI tax rates, please contact Pete Krieshok at (314) 214-7325 or via e-mail at firstname.lastname@example.org. You can also visit our corporate blog at https://insight.equifax.com/ for information on other employment tax matters that might impact your organization.
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