When hiring new employees, it is very important that the employer do his/her due diligence in finding dependable employees who have the necessary skills and who will contribute to the company for many years. Hiring the “wrong employees” can result in the employer’s unemployment compensation (UC) rate significantly increasing resulting in a cash flow burden to the employer for multiple years.
Accordingly, it is important that employers understand how their UC rate is determined by PA (and many other states). Some employers are under the misconception that the state pays the unemployed employee from state funds. That is far from correct. The state acts as an agent for the unemployed person. It takes monies collected from the employer in the form of employer UC taxes and distributes those monies to the unemployed. If there is a shortfall in the monies collected from the employer, the state will replenish those funds paid out to the unemployed by increasing the UC rate of the employer.
The employer’s rate is a reflection of the employer’s UC history from the date the employer became subject to the Pennsylvania (PA) UC law.
The employer’s experience rate takes into consideration (1) wages paid by the employer and reported to the department, (2) contributions paid to the UC Fund by the employer, and (3) benefits (monies paid to the unemployed employee) that are charged to the employer’s reserve account.
When benefits are paid to an unemployed worker, they may increase the employer’s UC rate for subsequent calendar years. The extent that UC benefit charges may affect an employer’s rate depends on the amount of the charges in relation to other values that have a favorable impact on a contribution rate. For example, if the amount of benefits paid is high in comparison to the size of the employer’s payroll or the amount of contributions the employer has paid to the UC Fund, the benefit charges will likely increase the employer’s UC rate. Thus hiring the “wrong employees” who have a tendency to work for short periods of time and are found not to be competent and dismissed, will drive up the UC rate as the outflow of benefits paid will likely exceed the inflow of taxes paid into the UC Fund by the employer.
The reserve account balance is a lifetime figure. An employer’s reserve account balance is determined by subtracting the benefits charged to the employer from the amount of contributions paid by the employer, over the lifetime of the employer’s UC account. Benefits paid decrease the employer’s reserve account balance and lower the reserve ratio, which can result in a higher contribution rate. It is important to note that benefit charges never leave the calculation of the employer’s reserve account balance. However, their impact can be diminished over time if the employer’s future contributions exceed his future charges.
The “reserve ratio factor” is a component of the experience rate. This is the ratio of an employer’s reserve account balance to his average payroll for the most recent three fiscal years. The higher the reserve ratio is, the lower the employer’s rate will be.
The “benefit ratio factor” is another rate component of the experience rate. This is the ratio of the employer’s average benefit charges to his average payroll, both for the most recent three fiscal years. The higher the benefit ratio is, the higher the employer’s rate will be. Benefit charges directly increase the benefit ratio and thus can raise the employer’s contribution rate. The benefit ratio factor looks only at benefit charges for the most recent three fiscal years. Therefore, benefit charges cease to affect the benefit ratio factor when they are no longer within this three fiscal year period.
Hopefully, it is clear from the above that benefits paid to employees have a negative impact on the employer’s UC rate, and thus the hiring of employees who will fit within your company’s culture and contribute to your company is so important.
If you want to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
