The Hidden Cost of Employee Turnover: Increased Unemployment Taxes for Merit-Rated Employers
Another great tip from the TALX Client Service Team.
are many widely published studies available that attempt to quantify the costs to
employers of turnover. Most use the formula turnover costs = costs of hiring new employees
+ cost of training new employees. What is commonly missed in the equation is that
higher turnover means higher unemployment taxes. It is the “hidden” cost of employee
Unemployment Taxes are Calculated
the unemployment compensation laws were originally enacted in the 1930s, the intent
was to provide a supplement to individuals who were unemployed through no fault of
their own. Individual states have been free to enact and administer their own unemployment
compensation regulations, provided they comply with established federal rules and
bear the cost of unemployment compensation through a payroll tax paid to the states
in which they pay wages. The taxes go into a state fund specifically earmarked for
the payment of unemployment benefits. Like other business taxes, unemployment compensation
taxes are additional overhead to the employer. However, there is a major difference
between unemployment and other business taxes. Most business tax rates are fixed by
law. Unemployment tax rates fluctuate based on the employer’s payroll and the amount
of unemployment benefits charged against its account.
employer’s unemployment tax rate determines how much UI taxes are paid per employee.
Contrary to what many believe, unemployment taxes are paid on EVERY employee, not
only the ones who file for benefits. An employer’s state unemployment tax rate is
determined by a combination of state factors (health of the state trust fund balance)
and individual employer factors (payroll and benefit charges attributed to the employer).
An employer’s assigned tax rate is applied to each employee’s earnings until the state
taxable “wage base” (amount subject to the tax) is reached. State unemployment tax
rates range from 0% to 12.27%. State taxable “wage bases” range from $7,000 to $36,800.
For example, an employer’s assigned unemployment tax rate is 2.10% and the state wage
base is $12,000. The employer’s annual unemployment tax cost for employees earning
$12,000 and above is $252 per employee.
Does Turnover Increase Taxes?
impacts unemployment taxes in two ways. First, the separations may result in claim
filings that can result in an increase in benefit charges which in turn impacts experience
rating. Second, the taxable wage is “re-started” so that the employer does not realize
the benefit of the cap on employee earnings for the collection of unemployment taxes.
Impact on Unemployment Taxes: Re-Starting the Wage Base
A and Employer B hire a customer service representative January 1, 2010, to begin
work in their Los Angeles, California, offices. California’s taxable wage base is
$7,000. Both employers have a 2010 tax rate of 2.30%. Employer A uses hiring and retention
best practices and retains the new hire the entire year. Employer A’s annual unemployment
costs (taxes) for this position are $161. Employer B has a high rate of turnover and
has to re-hire for the same position three times during 2010. Each employee earned
over $7,000 prior to leaving the business. Employer B’s annual unemployment costs
(taxes) for the customer service position are $483. The cost of the turnover to Employer
B is $322 for just the one position.
taxes are one of the few taxes employers can directly control. One way employers can
effectively minimize unemployment costs is to utilize best practices in hiring and
This weblog is sponsored by TALX.
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