Page 289 - Essentials of Payroll: Management and Accounting

ESSENTIALS of Payr oll: Management and Accounting
Under this approach, the ongoing balance of a firm’s unclaimed
contributions from previous years is reduced by unemployment
claims for the past year and then divided by the average annual
payroll, resulting in a reserve ratio. Each state then applies a tax

rate to this ratio in inverse proportion to the amount (i.e., a low
reserve ratio indicates that nearly all contributed funds are being
used, so a high tax will be assessed).

Making Voluntary Unemployment Tax Contributions
If a state uses the reserve ratio method described in the previous section

to arrive at the contribution rate charged to a business, then the business
may have the option to contribute additional funds into its account. By
doing so, it can improve its experience rating and thereby reduce the
contribution rate charged by the state. In most cases, a company must

T IPS &T ECHNIQUES

Changes in the state contribution rate are based on four possible
formulas (see the “Calculating the Unemployment Tax Contribution
Rate” section); however, the key issue for all formulas (excepting
Alaska’s) is the amount of unemployment benefit claims by former
employees of a company, so obviously the smallest number of
employee terminations will result in the smallest contribution rate.
Keeping this in mind, if a possible layoff is coming up, it may be
worthwhile to verify the exact time period over which the next con-
tribution rate calculation will be made (usually the calendar year),
and then time the layoff for a period immediately thereafter, so that
the contribution rate for the next year will not be affected. By taking
this action, the contribution rate in the following year will increase
as a result of the layoff, thereby pushing the added expense further
into the future.

262