Dear Dan: One of the costs I didn’t anticipate when we started hiring workers was the tax for unemployment insurance. Recently we received notice that an employee who left had filed for unemployment. How does this system work and how can we minimize the costs? – FUTA Unaware
Dear FUTA: Got employees? If so, and you’re like most other small businesses in the U.S., odds are good that you’ll have an unemployment claim filed against you sometime in the near future. The more claims that are filed against your Unemployment Insurance (UI) account, the more it ends up costing your business.
Federal Unemployment Tax Act (FUTA) rates are “experience-based,” which means the fewer claims you have the less you pay. Basically, if you employ one or more individuals who work at least 20 weeks during the year (not necessarily in a row), or paid at least $1,500 in wages during any quarter, you must pay FUTA taxes, and file a Form 940, the annual FUTA tax return.
The unemployment insurance system runs under a federal/state partnership. For the most part, the state provides the benefits, and the federal government pays to administer the program. And you, as an employer, pay taxes to both in order to fund it all. And be aware that only the employer pays the FUTA tax; it is not deducted from the employee’s wages.
What irks many business owners is that some unemployment claims aren’t justified – employees who voluntary quit, for example. Employers can and do challenge unemployment claims they feel are not justified. But will it be worth your time and effort to challenge an ex-employee’s contention, assuming you’d know how to do that?
Here are seven things small businesses do to either directly or indirectly minimize FUTA payments:
1) Verify your unemployment insurance account with the state annually to make sure it is accurate.
2) Request and file resignation letters from workers who leave voluntarily.
3) Examine any unemployment insurance claims received, whether you challenge or not.
4) Keep detailed records of events and circumstances concerning employee termination.
5) If turnover increases, explore the reasons why. If you can take steps to reduce employee turnover, claims against your unemployment account should drop, which will in turn reduce your costs (taxes).
6) Some states offer discounts for prepaying UI taxes. If your state allows this, and your cash flow is good, it could save you some money.
7) Employers can generally take a credit against FUTA taxes owed for amounts paid into state •
Daniel Kehrer can be reached at
editor@business.com.
