March 13, 2002
UNEMPLOYMENT COMPENSATION ISSUES
By: Kevin E. McCarthy, Principal Analyst
You asked for a description of how unemployment insurance (UI) compensation taxes are calculated in Connecticut. You were interested in how a company's rate is determined, whether the legislature plays a role in this process, and how Connecticut's system compares to that of neighboring states.
In Connecticut, the amount of UI tax that a private sector employer pays is a function of the (1) amount of wages it pays that are subject to the state's taxable wage base; (2) the amount of unemployment benefits paid to the employer's workers over a specified period of time (i. e. , the amount that is "charged" to the employer's account reflecting its experience); and (3) solvency of the state's unemployment compensation trust fund. The taxable wage base is currently $ 15,000 and the total tax rate ranges from 1. 9% to 6. 8%. New employers are charged 2. 1%. Government agencies, non-profit employers, and federally-recognized Indian tribes and their subsidiaries can instead choose to reimburse the unemployment compensation fund for the total amount of regular benefits. Non-profit employers must also pay one half of the extended benefits paid to claimants that are attributable to service in their employ. State and municipal agencies must pay the total amount of extended benefits.
The legislature does not play a role in determining the tax for individual employers. The Department of Labor has prepared a guide for employers, which is available on its Website, http: //www. ctdol. state. ct. us/uitax/employer-guide. htm.
Massachusetts, New York, and Rhode Island have similar tax systems. In Massachusetts, the taxable wage base is $ 10,800 and the total tax rate ranges from 0. 6% to 9. 3%. In New York, the taxable wage base is $ 8,500 and the total tax rate ranges from 1. 1% to 9. 5%. New employers are charged 4. 1%. Rhode Island does not have a solvency component to unemployment tax. Its charged rate ranges from 1. 66% to 9. 76%. A new employer has a charged rate of 1. 62%. The taxable wage base is $ 12,000.
In addition to the state taxes, employers across the country pay a federal unemployment tax, which funds state administrative costs. OLR memo 2000-R-0091 provides further information about the federal tax.
The Social Security Act of 1935 established the UI program as a federal-state cooperative effort. Today each state, Puerto Rico, the District of Columbia and the Virgin Islands administers its own UI program to provide a safety net for individual workers who are temporarily unemployed through no fault of their own. The U. S. Department of Labor adopts regulations and guidelines for UI, but each state makes key decisions about benefit levels, eligibility rules, employer contribution rates and other issues.
HOW A COMPANY'S TAX IS DETERMINED IN CONNECTICUT
An employer's UI tax rate is determined by adding its charged rate and solvency rate. The charged rate, also known as the experience rate, is based on the premise that an employer's contributions to the state's unemployment compensation trust fund should reflect its use of the fund. The charged rate represents the ratio between the benefits paid to that employer's unemployed workers during a specified period of time and the total amount of taxable wages paid by the employer during the same period.
In general, an employer's unemployment compensation tax account is charged for the amount of benefits that its employees receive. But there are several circumstances under which an employee's receipt of benefits will not affect an employer's tax rate. An employer's experience account will be unaffected by benefits that are paid for an employee who:
1. voluntarily quits his job for a good cause that is attributable to the employer;
2. is on temporary layoff from his regular work or who has been recalled after a temporary layoff, but leaves his employer for a new job;
3. leaves work with an employer that is outside his regular apprenticeable trade to return to work in his regular apprenticeable trade;
4. leaves work solely due to a government regulation or statute;
5. leaves part-time work with his employer to accept other full-time work;
6. leaves the employer to care for a seriously ill spouse, parent, or child;
7. leaves employment to protect herself or a child living with her from domestic violence;
8. continues to be employed to the same extent by an employer at the time he establishes his claim as he had been during his base period provided the employer gives timely notification to the labor department; or
9. had earnings of $ 500 or less from the employer during his base period.
In addition, dependency allowances (e. g. , extra benefits for a dependent spouse or child) do not affect an employer's experience account.
The typical period upon which an employer's rate is based is the previous three years, ending each June 30. But, if there are chargeable benefits for at least the 12 months preceding June 30, the employer can be rated based on that experience. If the employer does not have sufficient time on which to be experience rated, its rate will be the higher of 1% of its taxable wage base or the state's five-year benefit cost rate (currently 2. 1%). The labor department computes the latter figure annually by dividing the total benefits paid to all claimants in the state during the five years by the total taxable wages paid by all employers for the same period.
Employers are subject to a 1. 8% to 6. 7% charged rate. The charges are assessed in increments of . 1% and thus there are 49 steps in the rate. If the percent is not an exact multiple of . 1%, the charged tax rate will be the next multiple higher.
The solvency tax is designed to maintain a balance in the Unemployment Compensation Trust Fund equal to 0. 8% of total wages paid to workers by contributing employers during the previous fiscal year. The rate is determined as of December 30th each year and ranges from 0% to 1. 4%. The solvency rate is the same for all employers. If an employer's experience rate is 3%, and the solvency rate is 0. 1%, the employer's total tax rate would be 3. 1% (. 1% + 3% = 3. 1%).
The employer multiplies its tax rate by its taxable wage base. The wage base is the level of wages the state determines is subject to taxation (federal law bars states from setting a base lower than $ 7,000). Connecticut's wage base is $ 15,000. This means that the first $ 15,000 of every covered employee's salary is taxable. So, continuing the example above, if an employer's total tax rate is 3. 1% and he has three employees earning $ 30,000 each, his unemployment taxes are $ 1,395 (3. 1% x $ 45,000 ($ 15,000 x 3) = $ 1,395).
SYSTEMS IN NEIGHBORING STATES
A private employer's tax is experience rated. It reflects the size of the employer's payroll, its number of employees, the amount of UI benefits charged against its account, and the amount of reserves in its account and in the Massachusetts unemployment compensation fund. The taxable wage base is $ 10,800.
Each September, the state's unemployment compensation trust fund balance is divided by the total payroll for all employers, yielding the fund's "reserve percentage. " This reserve level determines the following year's contribution schedule. In some cases, the reserve level calculation may be overridden by legislation, as was the case in 2001.
The initial contribution rate for new employers without an UI history is set at the positive reserve percentage of 10. 5 - 11. 0 for the current schedule. Therefore, this rate changes any time the schedule changes. New construction industry employers are assigned the average rate of employers in this industry. The "new employer rate" remains in effect for two years and then experience rating begins.
The state also maintains a solvency account to finance benefits that cannot be charged to a specific employer. These include dependency allowances, approvable voluntary separations, and benefits charged to accounts that have been depleted. The state distributes the solvency account's deficit proportionally among all employers. Employer accounts are charged each year based on the statewide solvency assessment.
Local and state governments entities and certain non-profit employers may choose, in lieu of paying the quarterly contribution, to reimburse the state when benefits are actually paid to their former employees. Under this option, the employer is billed for the cost of any and all benefits actually paid to former employees, including dependency allowances; extended benefits; benefits paid when an employee quits a job and subsequently requalifies for benefits; and even benefits paid which may be subsequently disallowed. In contrast, under the contributory method, these costs would be charged to the appropriate solvency account.
A private sector employer's UI tax rate is determined by its normal and subsidiary tax. The amount of money in the UI Trust Fund determines the employer's normal tax rate while the balance in the General Account determines the subsidiary tax rate. Both of these taxes are experience rated, meaning they are dependent upon the employer's unemployment experience.
The normal part of the tax rate can vary. When an employer first becomes liable for UI, the new employer tax rate is assigned. This rate is fixed each year according to the size of the UI Trust Fund. The maximum normal new employer tax rate is 3. 4%, while the subsidiary rate is currently 0. 625%.
After filing UI reports for the five quarters, the employer may qualify to receive a rate based on its experience. An account balance is maintained for each employer as a bookkeeping device to calculate rates, which equals the normal contributions paid on time minus any benefits paid to former employees that have been charged to the employer's account. This balance is divided by the employer's five-year average taxable payroll. If the employer has been liable for less than five years, the average is computed from the initial date of liability to the end of the last payroll year. The result is called the account percentage, and depending upon an index that considers the conditions of the UI fund, will correspond to a particular normal rate on the tax rate table. The total tax rate includes a 0. 075% tax on all employers. This tax is used to develop automated programs and to fund staff positions to assist UI claimants in making a diligent effort to find employment.
The benefit equalization factor can also affect the employer's tax rate from the fifth quarter through the twenty-first quarter of liability, if the account is positive. This factor creates a graduated rate reduction for newer employers. This is done to give new employers an equal opportunity with established employers to earn rate reductions.
An employer may qualify for a "stable employment" benefit. This benefit applies when an employer'shttp: //www. labor. state. ny. us/business_ny/unemployment_insurance/uiemplyr/glossary. htm account percentage is negative on the computation date, and its payroll in the preceding year is at least 80% of its three-year average. In such a case, the employer's account percentage for the next year is improved by four percentage points for the purposes of determining the employer's rate. However, if the benefit is applied to the employer's account percentage, its normal rate cannot be less than 6. 1%.
Government agencies and non-profit organization can provide UI benefits under a reimbursement system that is similar to Connecticut's.
Rhode Island's tax is based on the employer's experience rating an its reserves. The reserve is the net balance of the employer's account as a percentage of its average taxable payroll for the last 36 months. Currently, the tax ranges from 1. 66% to 9. 76% on a taxable base of $ 12,000. There are 24 tax brackets. New employers are charged 1. 62% for the first three years. Rhode Island does not have a solvency tax as Connecticut does. But, in addition to the UI tax, employers must pay two taxes totaling 0. 24% on the taxable base to fund job training, counseling, and assessment services.