State and Federal Unemployment Taxes

Employers pay two types of unemployment taxes. State unemployment taxes are paid to this department, deposited into a trust fund and can only be used for the payment of benefits. The state tax is payable on the first $8000 in wages paid to each employee during each calendar year. Federal unemployment taxes are paid to the Internal Revenue Service and are used to pay for the cost of administration of the state programs, the federal cost of extended benefits, and to make loans when state unemployment trust funds experience shortfalls and have to borrow to pay benefits. The federal tax is payable on the first $7000 of wages paid to each employee during each calendar year. On an annual basis, the department and IRS conduct a cross match to ensure that employers are paying both taxes. Payment of state unemployment taxes in a timely manner reduces the federal unemployment tax rate from 6.2% to .8%, so it is important to pay your state unemployment taxes on time.

New Employer Rates

Employers pay unemployment taxes at a New Employer rate until such time as they earn a rate based on their "experience" with unemployment. Beginning July 1, 2004, the new employer rate for most employers is one percent (1%). However, if you are an out of state (foreign) corporation classified under the North American Industry Classification System (NAICS) as 236 Construction Building, 237 Heavy/Civil Engineering or 238, Specialty Trades foreign construction corporation, you will be assigned a "New Employer" rate based on the industry average of all other similarly classified businesses during the past calendar year.

If you are being assigned a "New Employer" rate for liability prior to July 1, 2004 it will be assigned based on your NAICS Code and will neither exceed Rate Class 11 of the rate schedule then in effect, nor will it be less than one percent.

Experience Rating

All covered employers paid a state unemployment tax rate of 2.7% until 1941. An "experience rating plan" then went into effect that reduced rates for employers with favorable unemployment records. Under this plan, the number of unemployment benefit payments affects the tax rate. The more benefit payments that are made to former employees, the higher the tax rate (up to a statutory maximum rate). Because rates are related to experience with unemployment, experience rating should act as an incentive both to take steps to help stabilize employment and supply information needed to prevent benefit payments to ineligible persons.

Qualifying for an Experience Rate

The law requires at least one complete calendar year of benefit liability before an employer receives an experience rating. Benefit liability means that unemployment insurance payments could have been charged to the employer's experience rating throughout a complete calendar year. It is not necessary for unemployment insurance payments to have actually been charged. Because tax rates are recalculated only on an annual basis, most employers pay unemployment insurance taxes at the new employer rate for at least two years before getting an experience rating. Without exception the tax rate of an employer that has had three calendar years of benefit liability will be based on experience during the last three years. After three years, the rate is based on a rolling three year experience.

Benefit Ratio

To compute a benefit ratio, the department divides the total amount of benefits charged to your record during the last calendar year (or last two or three calendar years if you have been liable for benefits that long) by the total taxable wages you reported for that same period. This ratio is used to set your tax rate.

EXAMPLE:

Year	Benefits Charged To Your Record	Taxable Wages Paid By You
2000	$ 2,448	$ 120,954
2001	$ 2,732	$ 98,520
2002	$ 1,675	$ 105,617
	_______	________
	$ 6,855	$ 325,091

6,855 divided by 325,091 = .02108 (benefit ratio)  

Determining Your Tax Rate

The lowest possible benefit ratio is .00000 - no benefits were charged to that employer's account over the last three years. Employers with a zero benefit ratio are assigned the lowest tax rate in effect for that year (rate class 0). Rate class "0" is assigned the lowest rate in each schedule (see below).

All other employers are then placed in the twenty tax rate classes that are higher than zero. No employer is assigned to a higher class than any other employer with the same benefit ratio. Rate Class 1 is made up of employers with the lowest benefit ratios above zero and Rate Class 20 is made up of those with the highest benefit ratios.

Your rate depends upon two factors: (1) How your benefit ratio compares with other employers' benefit ratios, and, (2) Which rate schedule is in effect.

The Rate Schedule information is also available.