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how will unemployment affect tax returns

Unemployment insurance (UI) claims all have some effect on an employer, but the effect will be small or major, depending upon the circumstances. The main determinants of how a UI claim will affect a given employer are:

Types of Employing Units Top of Page

While anyone who pays a worker for personal services is an "employing unit" under the law, not all employers are liable for unemployment taxes. By the same token, not all money paid for personal services falls under the definition of "wages" that are subject to reporting and UI taxation. For example, a person or company that engages an outside attorney to provide occasional legal advice is an "employing unit", but does not thereby become an "employer" liable to report the attorney's fees to TWC as wages and pay UI tax on such earnings. Likewise, some organizations are exempted from wage reporting and tax liability by virtue of special exemptions in the law. Organizations that are liable for wage reporting and UI payments either pay quarterly UI taxes (determined by applying the employer's tax rate to the first $9,000 of each employee's earnings in a calendar year) or have reimbursing status (they reimburse TWC dollar for dollar for any UI benefits paid out that are based on wages reported for the claimant). The following list indicates the most common categories of employing units and whether they are or are not liable for wage reporting and UI tax or reimbursement liability:

  1. Customers/clients of independent contractors: such employing units do not report the money they pay to the independent contractors, owe no UI tax on such payments, and have no financial involvement in any UI claims that might be filed by such workers.
  2. Some employing units are too small or pay insufficient wages to be liable under the UI system. For example, a private-sector employing unit that pays less than $1500 in wages in a calendar quarter is exempt (for household/domestic employers, the threshold is $1000 in a calendar quarter). A tax-exempt non-profit organization with fewer than four employees is also exempt from liability. During the period of non-liability, such employing units are treated like the employing units in the first category.
  3. Some employing units have some exempt and some non-exempt employees. For the exempt employees, they are treated just like the employing units in the first category above. For the non-exempt employees, they are treated like any other liable employer - see below. Some organizations, such as churches, have nothing but exempt employees and are non-liable. For a complete list of UI exemptions, see the Texas Labor Code, Chapter 201, Sections 201.042-201.078, starting at .
  4. Private taxed employers report their employees' wages, pay quarterly UI tax on such wages (up to the first $9,000 of each employee's earnings in a calendar year), and have potential financial involvement (chargeback liability) in any UI claims that might be filed by such workers.
  5. Reimbursing employers report their employees' wages, pay no quarterly UI tax on such wages, and have potential financial involvement (reimbursement liability) in any UI claims that might be filed by such workers.
  6. Taxed group account employers are in a large pool of similar governmental employing units and are treated like private taxed employers, except that any chargebacks are pooled and result in a pooled (shared) UI tax rate.
  7. Non-profit organizations can elect either private taxed employer or

    reimbursing employer status.

Type of Worker Involved Top of Page

As noted above, some workers (independent contractors and employees whose services are exempt from the definition of "employment") will not involve their employing units financially in a UI claim. All other types of workers have the potential to involve their employing units financially, depending upon whether a particular employing unit reported wages for the claimant during the base period of the claim. Here is a summary of the potential claim liabilities:

  1. Independent contractors - no wage reporting; no tax, chargeback, or reimbursement liability
  2. UI-exempt employees - no wage reporting; no tax, chargeback, or reimbursement liability
  3. All other workers* - wage reporting; tax liability if the employing unit is not a reimbursing employer; potential chargeback/reimbursement liability depending upon the base period

None of the three categories above affects the right to file an unemployment claim. Any worker who is no longer performing services for pay can file an unemployment claim. Of course, whether the claimant can actually go on from there and draw benefits depends upon whether the claimant meets the monetary eligibility, work separation, and continuing eligibility requirements under the law.

* The term "all other workers" includes anyone who is not either (a) accurately classified as an independent contractor or (b) an employee whose services are specifically exempted under the UI law. Since there are so many names applied to workers who perform services for pay, it would be impractical to list them all. To illustrate, such a list would include, but not be limited to, probationary employees, new hires, trainees, trial employees, introductory employees, day labor workers, casual employees, temporary employees who are not acquired through a staffing firm, "1099 employees", "contract labor" workers who are really only misclassified employees, regular employees, full-time employees, part-time employees, PRN staff, "permanent" employees, and seasonal employees. The legal presumption in Texas is that all services are in "employment" and are subject to wage reporting and taxation or reimbursement liability, and the burden of proof is on the employer to show that a particular worker is not in employment.

However, the term "all other workers" does not include employees of independent contractors, because those workers are employed by the independent contractor, and any UI claims they might file will involve the independent contractor. It also does not include temporary staff assigned by a temporary staffing firm or leased employees assigned by a professional employer organization (PEO, also known as an employee leasing firm), since such employees are employed by the staffing firms that assign them to clients, and any unemployment claims they might file will be the responsibility of those firms. See "Alternatives to Hiring Employees Directly" in Part I of this book.

Date of the Initial Claim Top of Page

The initial claim filing date determines two very important things: the benefit year during which the claimant may file weekly claims, and the base period of the claim. The base period in turn determines the wages that will be used to compute the claimant's weekly and maximum benefit amounts and which employers will have potential chargeback or reimbursement liability for any benefits paid to the claimant. Below is a chart showing what the base period looks like. Only base period employers have potential financial involvement in a UI claim; non-base period employers have no such liability.

Category: Taxes

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