The Federal Unemployment Tax Act (FUTA) requires employers to pay taxes based on their employees’ wages. In turn, these taxes fund federal unemployment benefits for eligible workers.
As an employer, if you have at least one employee who works at least 20 weeks per year, or you paid employees at least $1,500 in any quarter, you’re responsible for paying FUTA taxes. Employers are required to pay FUTA tax on amounts up to $7,000 paid to each employee as wages during the calendar year. The rate is 6%, but it can be decreased with a credit that allows eligible employers to pay an effective FUTA tax rate of 0.6%.
If your organization has been operating for any length of time, you’re obviously aware of your obligation to pay FUTA taxes. It may seem like there’s little you can do to control the cost of these taxes, or the unemployment insurance benefits you’re required to provide. However, there may be ways to better manage them. Here are five to consider:
1. Avoid layoffs and retain employees. Employers’ unemployment tax payments are partially based on the number of their employees who file unemployment claims. Thus, layoffs can be particularly costly. If your organization’s staffing needs tend to fluctuate, consider engaging a temporary staffing agency to meet short-term labor needs. Doing so will save you the time and cost of hiring employees only to later lay them off when business slows.
Also, continuously improve your hiring process to find optimal candidates for your organization and its culture. This will help lower turnover and enable you to retain employees. In turn, you’ll have fewer unemployment claims.
2. Train employees thoroughly and appropriately. Generally, workers qualify for unemployment benefits only if they lost their jobs through no fault of their own. But in some cases, even when an employer argues that an employee was fired for poor performance, the worker may still win an unemployment claim if the hearing officer finds that the employer didn’t provide enough training or provided the wrong kind of training.
3. Handle terminations carefully. If you decide to terminate an employee, consider offering severance and outplacement benefits. Doing so may potentially decrease or delay the initiation of unemployment benefits. Outplacement services that help a claimant find new work may also shorten the duration of unemployment benefits.
4. Build an intensive knowledge base of your state’s laws and rules. Eligibility for unemployment benefits is largely determined by the laws and rules of the state in which you operate. Thus, learning as much as you can about them can reveal helpful strategies.
For example, some states allow employers to “buy down” (proactively manage) their unemployment insurance costs. Essentially, this means that employers can acquire all or part of the unemployment benefits charges associated with their accounts.
In states where this is permitted, employers with an assigned experience rating and a history of paying benefits to former employees during that period can start a buydown payment. It’s typically made within 120 days of the beginning of the calendar year when the revised tax rate is effective. Such buydown payment arrangements, however, may come with hefty surcharges.
5. Work closely with a tax professional. Fully understanding the laws, regulations and latest guidance regarding FUTA taxes isn’t easy, even for employers that have been operating for years. And, as mentioned, unemployment benefit claims depend largely on state law. Contact Stelios Payroll LLC for further information and state-specific assistance.
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