New Mexico’s New Method for Calculating UI Tax


It’s rare for a state to change its basic method for calculating employers’ unemployment tax rates, but New Mexico is about to do just that.

New Mexico’s impending calculation method change, enacted March 9, is especially noteworthy because it is the state’s second such change in three years. In 2013, New Mexico had been using the reserve-ratio method but in April of that year enacted a law (S.B. 334) that overrode the reserve-ratio method with the benefit-ratio method, effective Jan. 1, 2015. After more than a year of experimenting with the benefit-ratio method and having a higher minimum and higher maximum unemployment tax rate for experienced employers than before the change, the new law (H.B. 283) allows New Mexico to calculate employers’ rates with a fusion of the benefit-ratio and reserve-ratio methods, starting with rates effective July 1, 2016, and will lower the minimum rate for experienced employers.

The benefit-ratio method generally involves dividing an employer’s unemployment benefit charges during a period by the employer’s taxable payroll during a period, while the reserve-ratio method generally involves subtracting all unemployment benefits ever charged to an employer by unemployment tax paid by the employer and then dividing the result by the employer’s taxable payroll during a period.

New Mexico does not generally adjust employers’ rates each July 1 and under the new law still would adjust rates each Jan. 1, but there would be a one-time rate adjustment July 1, 2016, so that the updated calculation method may be in effect for rates applicable for the second half of 2016. The experienced-employer rates that are to take effect July 1 are to be those that would have taken effect without the new law, but multiplied by a reserve-ratio factor.

For positive-rated experienced employers, which generally have paid a higher amount of unemployment tax than the amount of unemployment benefits they have been charged, the reserve-ratio factor is less than 1 and therefore causes these employers to have a lower rate than they would have had without the new law. Negative-rated experienced employers, which generally have been charged a higher amount of unemployment benefits that they have paid in unemployment tax, would have a reserve-ratio factor of 1 and therefore would have the same rates as they would have had without the new law.

Michigan and Pennsylvania are the only two other states that calculate employers’ unemployment tax rates with a fusion of the benefit-ratio and reserve-ratio methods. Without regard to New Mexico, Michigan and Pennsylvania, the reserve-ratio method is used by 28 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands; while 16 states use the benefit-ratio method. Delaware and Oklahoma use the benefit-wage-ratio method, which involves examining wages that were paid to individuals whose unemployment benefits were charged to an employer.  Alaska uses the payroll-decline method, in which decreases in the number of employees working for an employer from one quarter to the next may influence the employer’s tax rate.

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