How is federal unemployment tax calculated
Removing the Mystery from the
Employer’s Unemployment Contribution
Wisconsin’s Unemployment Insurance (Tax) is a complicated and often confusing system. In this Tip we will address the funding side of the program, how the amount an employer pays is calculated. We will leave the benefit eligibility side for another issue.
What is the unemployment insurance program?
- The unemployment insurance program provides weekly benefits to eligible unemployed workers. These benefits provide economic stability to the workers and their families during temporary periods of unemployment and help lessen the effect of unemployment on the local economy. The program is financed solely through employer contributions (taxes).
What is the relationship between Wisconsin's Unemployment Insurance Law and the Federal Unemployment Tax Act (FUTA)?
- Unemployment insurance is a federal-state program jointly financed through federal and state employer payroll taxes. The federal unemployment tax is used, in part, to finance the administrative expenses of each state's unemployment insurance program and certain federal costs related to extended benefits. Employer payroll taxes collected under the Wisconsin Unemployment Insurance Law and all other state unemployment insurance laws are used only to pay benefits to unemployed workers.
When is the tax paid?
- Quarterly an employer is required to file form UCT – 101 which includes the calculation of the amount of unemployment tax due. The form and payment is due by the end of the month following the end of a calendar quarter. The State encourages filing on line and fill in the blank forms are available.
How is the Quarterly Tax (contribution) Calculated?
- A state statutory combined rate (adjusted for an individual company’s experience in drawing on their fund balance) is multiplied times a company’s eligible payroll. Each of these factors will be discussed below.
What are the State Statutory Rates?
- The Wisconsin Unemployment Statute contains 4 different rate tables labeled A – D. Each year, depending on the dollar amount in Wisconsin’s Unemployment Fund balance, a determination is made as to which table will be used for the following year. If the balance is low, as happens in an economic downturn, when benefit payments increase, the table with higher percentages is used. Conversely, as the fund balance grows, a table with lower rates is used.
- The rate table identifies a Basic Rate and a Solvency Rate. Together these make up the combined rate. A separate schedule exists in the table for small firms and large firms. Small firms are identified as having annual eligible payrolls of under $500,000.
- The Basic Rate – this portion of each tax payment is credited to an individual company’s account balance. The account balance is discussed
in more detail below in the section on Adjusting for Experience.
- The Solvency Rate – this portion of each tax payment is credited to a shared risk account called the balancing account. It is the condition of this account that determines which rate schedule, A – D, will be used in the next year.
What is Eligible Payroll?
- Historically eligible payrolls were the first $10,500 of wages paid to an employee in a calendar year. In 2008, the Wisconsin Senate passed a bill that increased the payroll limits to $12,000 for 2009 – 2010, $13,000 for 2011 – 2012 and $14,000 for 2013 and thereafter.
How is the Statutory Rate Adjusted for Experience?
- The State maintains an account balance (contributions minus benefits paid) for each individual company. An annual calculation is made by the state of the ratio of a company’s fund balance compared to their prior eligible payrolls. The resulting percentage determines where a company falls in the rate table. If a small business’s fund balance is 15% or more of eligible payroll, they pay the lowest rate (currently 0.27%). A small business with a ratio of negative 6% or less pays the highest rate (currently 9.8%).
- As a result of the experience adjustment, a significant difference in Unemployment Taxes can exist between a company with good experience (limited benefits paid) and bad. For example two companies, each with 15 employees making over the limit of $12,000 per year. One with the best rate and the other at the bottom.
$12,000 X 15ee X 0.27% = $648 annual tax$12,000 X 15ee X 9.8% = $23,520 annual tax
Some business owners question whether it is better to lay off employees and pay the higher tax in the future needed to replenish their reserve account or keep the employees on the payroll. The straight financial answer appears to favor lay-offs especially for higher paid employees.
- With some exceptions, the weekly Unemployment Benefit an employee receives is roughly 50% of what their pay averaged over the prior year up to the current maximum of $363 per week.
- Employees with annual pay in excess of approximately $36,000 would therefore receive less than the 50% because they would hit the ceiling.
- Normally benefits and payroll tax cost also stop with a lay-off.
- Historically the benefit period is 26 weeks although Congress has extended this period in times of broad spread economic distress.