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Best Practices for Limiting Unemployment Tax Exposure

David Rodeck

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A little research and preparation can lead to big savings on your unemployment tax exposure.

While state unemployment may seem like just another payroll tax, there is one important differentiator: State unemployment is the only one your organization can change to affect how much it will owe the government each year. By understanding the employer responsibility for unemployment benefits and using best practices to secure and deliver them, you can reduce your tax liability and improve your bottom line.

ADP's David Harrod recently delivered a webinar explaining ways your organization can save money by limiting unemployment tax exposure.

Understand Your Employer Responsibility

The Unemployment Compensation program helps support workers who are temporarily unemployed through no fault of their own. Employers need to pay taxes both to the federal government and to the states in which they operate to ensure this program's continuity. Then, if an employee is let go for an eligible reason — downsizing, for example — that employee can file for unemployment benefits.

Even though unemployment insurance is a federal program, it's operated at the state level. To account for this, your firm must be familiar with the unemployment laws in every state where you do business, as there can be key compliance differences between states, such as the amount of time you have to respond to claims, worker eligibility for benefits and tax rates.

Respond to All Government Requests

Any time you're facing an unemployment claim, your organization must respond to all government requests for information. State governments are under federal pressure to reduce program overpayments and can penalize employers who don't respond properly.

"I can remember a time when employers wouldn't respond to claims," says Harrod. "With changes in federal and state regulations, that's not the case today." Still, he pointed out that there can be multiple documents to reply to, and these can be overlooked.

Depending on your state, you may need to do more than simply return a claim request. Sometimes, you must also complete an additional questionnaire or respond to an agency inquiry by phone. Failing to do so could put you in a noncompliance situation and limit your ability to appeal a wrongful claim.

Collect Proper Evidence for All Separations

Whenever an employee leaves your organization and shouldn't be eligible for benefits, Harrod stresses that you should prepare the evidence to challenge a potential unemployment claim. For example, if it's a misconduct discharge, you should build your case with evidence like prior warnings, witness statements and any recordings of the incident.

You should even prepare for cases that don't seem like they would pose any problems.

"Some of the costliest claims I've seen have come from voluntary quits," says Harrod. "The employee seemed to leave on good terms, but then came back with an allegation of unsafe work conditions or harassment."

Don't leave things to chance by letting the employee leave with a simple handshake or email agreement. Instead, Harrod recommends conducting a proper exit interview and asking for a formal resignation letter explaining that the employee is leaving on good terms, even if it seems unnecessary at the time.

Prepare for Appeals

If a former employee is awarded unemployment benefits that you disagree with, you have the right to appeal. Not paying out for unjustified unemployment charges can reduce what you owe, and in times like these, Harrod recommends explaining your case to the state unemployment agency in a clear, organized matter. This means presenting evidence that shows why the employee is not eligible for unemployment — without going overboard.

"I've seen employers present so much information, like records of the employee being tardy years ago, that aren't connected to the termination," says Harrod. When the government can't clearly see your case, they're more likely to rule against you.

On the day of the appeal, you should make sure you're ready with all the proper documents and witnesses. For help with appeals, consider working with a partner like ADP that specializes in unemployment insurance.

"Employers on their own win appeals roughly half the time. With ADP's support, their win ratio goes up to, and even beyond 80%," says Harrod.

Watch Out for Benefit Charge Errors

Employers tend to focus on the appeals/claims side of unemployment, but Harrod notes that this is only half the battle. You could also save money by managing your tax rate proactively.

You should monitor ongoing benefit charges through your state unemployment insurance account to make sure there are no mistakes. For example, you could win an appeal saying you shouldn't be held liable for paying a claimant's benefits only to find that the state government charges your account anyway.

The US Department of Labor found, on average, state governments overcharged employers for unemployment benefits by 10.65% in 2018, which led to $2.9 billion in extra charges due to errors. ADP clients recovered more than $300 million from errors like these in 2018.

Consider Voluntary Contributions

Another way you could reduce what you owe is making voluntary contributions where you pay more into your state fund early in exchange for a lower tax rate. "I've seen a company voluntarily contribute an extra $12 which led to $100,000 in tax savings," says Harrod.

But he warns this really depends on the organization and the state, as voluntary contributions are not always the right financial move. It's a decision that should be reviewed with an unemployment insurance expert to determine whether it would make sense.

Learn More

A little research and preparation can lead to big savings on your unemployment tax exposure. For more information regarding the employer responsibility for unemployment benefits as well as other strategies you can use, be sure to listen to ADP's on-demand webinar, Best Practices for Limiting Unemployment Tax Exposure.