All companies with employees are required by law to carry unemployment insurance,
which serves to provide compensation to workers who lose their jobs for reasons for
which they are not responsible.
The premiums paid, however, seemingly have nothing to do with the cost of looking
for a job, or with the cost of supporting a family while a worker looks for a job.
So, what's behind the calculation puzzle?
Here's how it works
In 1935 the unemployment insurance program was enacted as the Social Security Act
and implemented by the Federal Unemployment Tax Act. From there, separate programs
have
been established by the states based on federal standards. The programs are governed
by
laws that determine employee eligibility, the amount of compensation received by
the employee, and the amount of time the funds are paid to the employee.
States collect taxes from employers based on wages paid, the amount of money paid
into an unemployment insurance fund, and the amount of money paid to employees from
this fund. Employers may also receive credits towards federal tax obligations based
on the amount of taxes paid to the state.
Funds received from the states are deposited in the Unemployment Trust Fund, with
each
state having a separate account. Separate accounts also exist at the federal level
for the administration of the fund.
What it means to your company
- An approximation of the cost of unemployment insurance is determined using three
components:
- Number of employees;the average tax rate levied against employers for unemployment
insurance;
- Taxable wage base.
The tax rate and the taxable wage base are determined by the state legislature.
The taxable wage base is defined as the dollar amount for each employee (regardless
of any difference in salaries) that when multiplied by the tax rate and the number
of employees, will yield an estimation of the cost of insurance to the employer.
Although the tax rates in some states may be the same, the cost of unemployment insurance
may be different.
According to a recent national survey taken by the Research and Analysis Bureau of
the Nevada Department of Employment Training and Rehabilitation, for the contiguous
states of Iowa and Nebraska the average tax rates are essentially the same at 0.93
percent and 0.75 percent, respectively. However, the taxable wage base in Iowa is
$25,430 and in Nebraska
it is $7,000. For a 125 employee company located in Iowa the annual costs for unemployment
insurance would be $29,993 as opposed to $6,563 in Nebraska, a difference in premium
of $23,430.
The states of Massachusetts and New York have the highest average unemployment insurance
tax rates in the country, at 4.5 percent. However, the costs of unemployment insurance
in Massachusetts is $60,750, or more than a third higher than the $39,375 paid in
New York.
As in the previous example, the difference of $21,375 is explained by the difference
in the taxable wage base. The Massachusetts tax base, at $10,800, is 33 percent higher
than New York's $7,000 base.
In the final analysis, operating costs are a primary concern for a company making
a location decision. The existing inequity in unemployment insurance cost between
the states is becoming a major factor in the location decision.
Dean Rud is CEO and founder of DMR & Associates of West Chester, Penn.,
(610) 429-2420.
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