Employers seeking to maximize the effectiveness of their payroll budgets and reduce payroll tax costs should be familiar with how their taxes are calculated in jurisdictions where they have operations.
Unemployment tax calculations are some of the most complex involved in payroll. Adding to the complexity are variations in the methods states use to calculate employers’ state unemployment tax rates.
All states except one use unemployment tax calculation methods that include unemployment benefits paid by a state or charged to employers’ accounts as a factor for determining rates. These factors are involved in the reserve-ratio, benefit-ratio and benefit-wage ratio methods. The District of Columbia, Puerto Rico and the U.S. Virgin Islands use the reserve-ratio method.
Standing alone is Alaska, which uses the payroll-variation method to calculate employers’ state unemployment tax rates. The payroll-variation method is so different from the others that employers operating in Alaska and payroll service providers with clients in Alaska should be especially attentive to its intricacies.
A full explanation of how the payroll-variation method works is in the “Alaska Unemployment Insurance” chapter of Bloomberg BNA’s Payroll Administration Guide, but what follows is a simplified explanation of this method.
The method examines variations in an employer’s gross payroll from one quarter to the next during the employer’s experience period, which typically consists of the 12 quarters ending on June 30 before the year when the unemployment tax rate would take effect, based on the payroll variations during the experience period.
For each pair of quarters during an employer’s experience period when its gross payroll declined from one quarter to the next, a quarterly-decline quotient equal to the percentage change in the gross payroll is recorded.
The employer’s average quarterly-decline quotient for its experience period is determined by adding the quarterly-decline quotients and then dividing the total by one fewer than the number of quarters in the employer’s experience period.
Forms can be submitted to the state Department of Labor and Workforce Development to request adjustment to an employer’s average quarterly-decline quotient when payroll declined from one quarter to the next because of certain qualifying circumstances that the state recognizes as not sufficiently related to a loss of employment. The qualifying circumstances include payments of certain bonuses and the inclusion of a seventh payment date in one quarter under a biweekly payment plan when the next quarter has six payment dates.
After the department determines which adjustments to average quarterly-decline quotients shall be made based on the adjustment-request forms it received, the department lists employers in the state in ascending order of their average quarterly-decline quotient. The lowest experience factor for the year then is generally assigned to the 5 percent of employers with the lowest average quarterly-decline quotients among all employers. For each subsequent 5 percent of employers rising to highest quotient on the list from lowest quotient, the experience factor increases.
To determine an employer’s total tax rate, an employer’s experience factor for a year then is multiplied by other factors that are the same for all employers, regardless of their payroll-variation experience.
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