ETS Tax Intelligence: SUI Tax Rate Forecasting
By June 30th, most of the employer-specific information used by state workforce agencies in determining state unemployment insurance (“SUI”) tax rates has been established. This is known as the “computation date,” the date employer tax rates are computed for the forthcoming rate year. Despite having information necessary to compute SUI tax rates, states will not issue tax rate notices for another four to nine months after the computation date. The time gap between when rates can be determined and when rates are actually issued presents a challenge for employers, particularly since this is also the period when employers are formulating next year’s budgets.
The difficulties presented by this time gap can be overcome by forecasting your 2017 SUI tax rates.
SUI Tax Rating Computations
The forecasting process takes into consideration historical employer-specific factors such as taxable payroll, benefit charges, contributions/tax paid in, and reserve account balances (collectively referred to as an employer’s SUI rating experience). Since most of this information is known mid-year, forecasts can be prepared with relative accuracy. However, there are certain state factors that can potentially impact that accuracy, including changes in rating formulas & methodologies (e.g., reserve vs. benefit ratio), tax rate tables, and surcharges.
Because most state workforce agencies use a rating computation date that ends on June 30th, changes in an employer’s SUI rating experience or actions taken after that date will have an impact on future SUI tax rates (e.g., 2018 rate, not 2017). Each state utilizes its own unique rating computation. With 53 U.S. jurisdictions (including D.C., VI, and PR), this can make forecasting SUI tax rates an onerous undertaking.
Mergers & Acquisitions (M&A)
When an employer undergoes M&A activity resulting in the movement of employees between legal entities, it will often require a transfer of an employer’s SUI rating experience from the predecessor employer to the successor employer. M&A activity can have significant implications to an employer’s current and future SUI tax rates and the taxable payrolls to which those rates are applied. State agencies mandate the reporting of the movement of workforce between legal entities to accurately compute an employer’s SUI rating experience. If not reported, employers are potentially subject to the underpayment of SUI tax, the assessment of interest & penalties, and the assignment of penalty tax rates (often the maximum allowed rate). Knowing the quarter a SUI tax rate will be revised and the financial impacts of such a revision is important to employers in managing risk.
New Employer Rates
When an employer first begins operations within a state, a new employer rate (“NER”) is assigned, which will typically apply for one to three years. Depending on an employer’s experience during this “qualification period,” transitioning from a NER to a merit rate can either be positive, negative, or neutral (i.e., the computed merit rate happens to be equal to the NER). To avoid significant unexpected changes from a NER to a merit rate, which can occur in the middle of a rate year (e.g., FL and TX), it is prudent for employers to forecast SUI tax rates and the quarter/year the merit rate will be assigned to avoid unexpected increases in SUI tax liabilities.
Taxable Wage Bases
Each calendar year, most states increase their annual taxable wage base. This can happen automatically due to indexing, as a result of legislative changes, or be based on some other state-specific measure (e.g., trust fund balances or average annual wage). With the enactment of new state and local laws increasing minimum wage levels, employers may begin to experience increases in the average annual wage, which could impact annual taxable wage base limits, not to mention an increase in taxable payrolls associated with those employees that have historically not met the wage base. Lastly, reductions in workforce decrease taxable wages, but this tax cost reduction is often offset by an increase in the SUI tax rate.
Forecasting SUI tax rates, in those states with sizeable taxable payrolls, allows employers the ability to reduce exposure to risks associated with SUI rate changes year-to-year. For more information, please contact Pete Krieshok at (314) 214-7325 or via e-mail at firstname.lastname@example.org. You can also visit our corporate blog for information on other employment tax matters that might impact your organization.
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