How Are Unemployment Tax Rates Calculated?
Understanding how unemployment insurance benefits work and how unemployment tax rates are calculated is essential if an employer is interested in keeping its unemployment tax rate low.
How Unemployment Insurance Benefits Work: In Minnesota, for each employee in covered employment, the employer must pay unemployment taxes on the employee’s “taxable wage base.” The taxable wage base is calculated for each year as equal to 60% of Minnesota’s average annual wage on June 30th of the previous year. In 2013, the taxable wage base was $29,000.00, so employers had to pay unemployment taxes on the first $29,000.00 of wages paid to each covered employee. The unemployment taxes paid by employers are then deposited into a trust fund administered by the State. When an employee qualifies for unemployment insurance benefits, his or her benefit payments are paid from the trust fund – not from the employer.
How Unemployment Tax Rates Are Calculated: The State calculates an employer’s unemployment tax rate annually based on three primary components: (1) the base rate; (2) the employer’s experience rating; and (3) additional assessments.
The Base Rate: The base rate is a common rate that applies equally to all employers. The base rate is calculated each year based on the amount of money in the State’s trust fund as compared to the total amount of wages paid in covered employment in the State. The base rate ranges from 0.10% to 0.50%. In 2013, the base rate was 0.50%.
The Employer’s Experience Rating: An employer’s experience rating is calculated by dividing 125% of the unemployment benefits paid on behalf of the employer during the 48-month period ending on the prior June 30th by the employer’s total taxable payroll for that same period, up to a maximum of 8.90%. For example, if $80,000.00 of unemployment benefits were paid on behalf of an employer with $4,000,000.00 in total taxable payroll during the 48-month period, the employer’s experience rating would be 2.50%.
For new employers, the state assigns an experience rating equal to the average experience rating in the State. However, if the employer is in a “high experience rating” industry, like construction, the State will assign an experience rating equal to the average experience rating for similar high experience rating industries. In 2013, the general experience rating for new employers was 2.50%, and the rate for new employers in high experience rating industries was 8.90%.
Additional Assessments: If the amount of money in the trust fund drops below certain levels in relation to the total amount of wages paid in covered employment in the State, the State may impose additional assessments on all covered employers to help make up the shortfall. In 2013, the State imposed an additional assessment equal to 14% of all unemployment taxes paid by each employer. The State also imposed an additional 0.10% Workforce Development Assessment to fund employment and training programs for workers who have permanently lost their jobs.
Takeaway: The only part of the unemployment tax rate that is within an employer’s control is the experience rating, which is calculated based on the amount of unemployment benefits paid on behalf of the employer. In general, the fewer unemployment benefits paid, the lower the employer’s experience rating will be. Therefore, one way to help keep an employer’s unemployment tax rate low is to avoid terminating employees unless they have engaged in employment misconduct and are not eligible for unemployment benefits.