Unemployment Insurance – The Controllable Tax

While often overlooked, the Unemployment Insurance (UI) tax is a unique and interesting business obligation, because it is the tax over which a business has significant control. The ability to control both the size of the tax base and the tax rate itself means there are planning opportunities here not found in other forms of tax.

Consider that:

• May be completely avoidable, depending on your state, business structure, and appropriate use of independent contractors, and
• It is highly sensitive to behaviors and actions that it can control, monitor, and measure.

Unlike a sales or income tax, unemployment insurance does not directly tax income or profitability. Rather, it is similar to an ad valorem tax in that it is a type of tax on productive capacity. But unlike an ad valorem tax, a business has control over the basis on which that tax is levied. UI is based on a measure of payroll and smart structuring of job and hiring decisions allows a business to maximize revenue with a given size workforce while minimizing payroll exposure to taxes.

Unlike other taxes, the unemployment insurance tax rate is graded based on experience. This means that, in most states, a firm’s rate is largely based on its past success in defending UI claims. Because of this user interface experience rating aspect, implementing effective changes today benefits not only the current quarter, but years to come.

Businesses that operate with the consequences of UI in mind can reap benefits beyond a lower tax rate. They often see improvements in communication and human resource processes, as well as becoming more efficient due to some standardization. In implementing change, proactivity is key and the HR department is where most of the work should be done, especially in the areas of job posting, selection, communication and retention.

It was mentioned that the proper use of independent contractors can help a business avoid unemployment taxes altogether. But “appropriate” must be understood in light of the UI laws in the states where it operates. Each state’s law regarding independent contractors must be understood or the business could face contractors being reclassified as employees.

However, if properly managed, unemployment insurance can be reduced until it becomes a relatively small business obligation. But to accomplish this, companies must implement changes with a thorough understanding of their state’s UI laws, policies, and practices. Therefore, companies should consider consulting with experts in each new state where they are doing business, rather than learning state-specific laws as mistakes are made.