Voluntary Contributions May Help Lower Unemployment Insurance Tax Costs


Businesses seeking to maximize the efficiency of their operations should recognize that numerous states allow them to reduce payroll tax costs through voluntary contributions that could lower their unemployment tax rates.

Savings may be achieved through a voluntary contribution to a state when the contribution amount is less than the amount of unemployment tax that would be avoided because an employer acquired a lower unemployment tax rate through the contribution than it otherwise would have been assessed.

Among the 27 states that generally allow voluntary contributions to be paid, 22 states use the reserve-ratio method for calculating experience-rated employers’ unemployment tax rates: Arizona, Arkansas, California, Colorado, Georgia, Indiana, Kansas, Kentucky, Louisiana, Maine, Massachusetts, Missouri, Nebraska, New Jersey, New York, North Carolina, North Dakota, Ohio, Rhode Island, South Dakota, West Virginia and Wisconsin. A voluntary contribution paid by an employer to any of these states increases the employer’s reserve ratio with that state, and sufficiently high increases to the reserve ratio may decrease the employer’s unemployment tax rate assessed by that state.

California and Louisiana do not always offer employers the opportunity to improve their unemployment tax rate through voluntary contributions. California allows voluntary contributions only if unemployment tax rate schedules E, F or F+ is not in effect, and as Schedule F+ is in effect for 2016, employers currently may not make voluntary contributions to California. Louisiana allows voluntary contributions only if its solvency surtax, federal-loan interest surtax or debt-financing assessment are not in effect, and as none of these are in effect for 2016, employers currently may make voluntary contributions to Louisiana.

Minnesota, Texas and Washington use the benefit-ratio method for calculating experience-rated employers’ unemployment tax rates. For these states, voluntary contributions would offset the amount of unemployment benefits that would be considered when calculating an employer’s unemployment tax rate, consequentially decreasing the employer’s benefit ratio. A sufficient decrease to an employer’s benefit ratio may decrease the employer’s unemployment tax rate assessed by a benefit-ratio state.

Michigan and Pennsylvania use a fusion of the reserve-ratio and benefit-ratio methods to calculate employers’ unemployment tax rates, but voluntary contributions to them help employers by increasing their reserve ratio.

Each state that accepts voluntary contributions has a deadline by which they must be submitted to influence employers’ tax rates for a year, or in the case of New Jersey, the 12-month period that starts July 1 and ends June 30.

States vary regarding additional restrictions for submitting voluntary contributions beyond merely a deadline. For example, Kentucky limits voluntary contributions to the total amount that would have allowed an employer’s unemployment account with the state to have a reserve ratio of zero on the state’s most recent computation date of July 31, while South Dakota does not have any additional restrictions.

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