Tax Intelligence: Understanding SUI Tax Rate Notices
As of the issuance of this Tax Intelligence, only five (5) states have yet to issue calendar year 2015 state unemployment insurance (“SUI”) tax rate notices: HI, MA, MS, NY, and PR. With 53 separate jurisdictions issuing SUI tax rate notices, understanding each can be complex. To complicate matters, as organic growth and merger & acquisition (“M&A”) activity increases, SUI tax rates can be significantly impacted.
An employer’s SUI tax rate is calculated using one of four methodologies: (1) reserve ratio, (2) benefit ratio, (3) benefit-wage ratio, or (4) payroll variation (also referred to as payroll decline). Each jurisdiction utilizes a slightly different method of implementing their chosen rating methodology, leading to confusion among employers. And although uncommon, New Mexico recently switched from a reserve ratio to a benefit ratio calculation to more closely link employer’s rates to their more recent activity in benefit charges. Our focus will be on the reserve ratio (30 states) and benefit ratio (17 states) methodologies used by the majority of states.
- Benefit Charges: Amount of benefits paid to former employees and charged to employer’s account.
- Reserve Balance: All taxes/contributions paid to the jurisdiction since employer became liable minus all benefits charged since employer became liable.
- Taxable Payroll: Amount of wages paid to employees in the jurisdiction subject to unemployment tax, up to the annual taxable limit.
In reserve ratio states, the SUI tax rate is generally computed by applying the “reserve ratio” to a state-prescribed table. Since the calculation uses information from the time the unemployment tax account was created, if an employer experiences a large reduction in workforce the associated benefit charges can have a negative impact on an employer’s SUI tax rate for many years to come.
In benefit ratio states, the SUI tax rate is generally computed by applying the “benefit ratio” to another factor or factors or to a state-prescribed table. Unlike the reserve ratio, the calculation uses shorter term experience, which means that benefit charges associated with a large reduction in workforce will only impact the employer’s SUI tax rate for the three to five years of benefit charges and taxable payroll used in developing the SUI tax rate.
Impact of Mergers & Acquisitions (M&A) on SUI Tax Rates
Understanding SUI tax rate notices is especially important when an employer has engaged in M&A activity, whether an internal employee realignment or a traditional third-party acquisition. After the effective date of an M&A event, jurisdictions will typically process a transfer of unemployment experience (i.e., the various rating factors identified above), when applicable, using information required to be filed by the employers involved in the M&A event. If a SUI tax rate notice has already been issued, the jurisdictions will issue a revised SUI tax rate notice to combine the unemployment experience of the impacted employers and redetermine the SUI tax rate. This calculation can be complex and is based on a number of different factors (e.g., percent of the workforce being transferred in the jurisdiction, the relationship between the employers, the effective date of the transaction, whether the acquiring employer is currently liable in the jurisdiction, etc.).
Understanding SUI tax rating methodologies helps employers to better budget for tax costs and the ability to verify that the SUI tax rates being assigned by the taxing jurisdiction are accurate. For more information on how Equifax can assist employers with understanding 2015 tax rate notices and the impact an M&A event may have on your organization, 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 UI tax matters that might impact your organization.
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