In case you’ve been on vacation in Tahiti for the last year, the employment situation in Texas (and the entire US) has been somewhat on the rocks. To understand a little bit about how this affects your payroll taxes and why you are affected by this increase – even if you have had a good unemployment history – let’s do a little bit of Unemployment 101.
In the state of Texas, unemployment insurance (UI) is paid for by a tax on payroll dollars. This tax is paid exclusively by the employer. It is a common misconception by employees that “I’ve paid into unemployment for X years…”. Wrong – it is entirely paid by the employer. The tax rate that the employer pays is based on your individual company’s unemployment history. New companies or those with no record at all pay 2.7% payroll for the 1st 6 quarters. After that, it can either go up or down depending on your UI losses. In 2009, the lowest tax rate available – assuming that you had a completely stellar previous 3 years regarding unemployment – was .26% of payroll. In 2010, the rate jumped to .72%. This is an increase of 176% (or .46% of payroll). The biggest concern to most businesses is the maximum tax. In 2009, the maximum was 6.26%. In 2010, the maximum is 8.6% of payroll. Although this is a smaller increase by percentage (37% increase) it represents a potential increase of 2.34% of payroll. According to Commissioner Tom Paukins Office, the average tax rate in 2009 was .99%. In 2010 it is 1.83% of payroll and is expected to climb for 2011. It is important to note that the tax is levied on the first $9,000 of annual payroll for each employee. That means that if you have a lot of turnover, hire frequently, or have a majority of lower wage employees, you will have a higher effective tax rate than average.
The reason for the across the board increase is because the unemployment fund is out of money. Employees who lose their jobs through no fault of their own are eligible for benefits. Further, the Texas Workforce Commission (TWC) – contrary to the sentiments of the unemployed – is decidedly pro-employee and not pro-employer. TWC claims are overseen by 3 commissioners with 1 representing employers and 2 representing employees. Benefits are paid directly out of the general fund. These benefits are calculated and “charged back” to the former employer(s) of the employee. There is no political will to reign in the abuses to the system. In fact, there has been continual pushes to increase the time that individuals can collect unemployment (equaling more $’s pulled out of the fund and an increase in UI taxes to your company). This fund was never intended to be a welfare fund, and with many UI claims now being paid out for over a year it is unclear as to how or when the fund will stabilize again.
As you can see, the deck is stacked against the employer when it comes to unemployment conditions and tax rates. And as a business owner or manager you are the one to feel the brunt of the increases. However there are simple ways to reduce your exposure and ultimate tax liability – all which affect your financial bottom line and profitability as a company. I’ll follow up in my next post or you can contact me directly at kevin.cobb@focus1hr.com (512-257-0999). All of this advice is offered freely and can be corroborated with a phone call to your business CPA or an internet search.
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