Employment Tax 2022 – Year End Opportunities
As we approach year end, I am sure everyone in payroll has better things to do than to read another blog or article on wrapping things up, reconciling, etc. So I will keep this (relatively) short and sweet.
Can payroll drive some year-end savings or 2023 opportunities through advance planning? Well, maybe. Let’s consider a few in the State Unemployment Insurance space:
SUI Voluntary Contributions
Twenty-six states allow taxable employers to submit voluntary contributions to their state unemployment account in order to, potentially, lower the future year tax rate. The concept is fairly simple…an organization makes an additional (voluntary) payment to their SUI tax reserve account designed to increase the balance in the account and thus lower the tax rate assigned for the next year. The catch is how to determine whether such a payment is profitable or not.
Let’s take a simple example using the state of Ohio.
• An employer ended the 2022 SUI rate cycle with a positive reserve of $34,900
• The employer’s taxable payroll for the rate period was $1,000,000 (approx. 110 employees).
• The reserve ratio (reserves/taxable payroll) was 3.49% resulting in a rate of 5.8%
• In order to reduce the SUI tax rate the reserve must be increased to at least a 3.50% ratio (5.4% rate)
• A VC of $100 increases the reserves to 3.50% resulting in a rate reduction of .40%
• This results in a net savings of $3,500: $100 VC to bring reserves to 3.5%, times the .40% reduction savings of $4,000 on a $1,000,000 taxable payroll
Now here is the interesting thing to consider and something often missed. Since many employers outsource the SUI tax function, third parties (and even state tax authorities that sometimes calculate VCs on your behalf) will only utilize the taxable payroll they have on record for the business, projected forward. What if you see an expansion in 2023, including hiring 100 new employees in the state? Or if an acquisition or corporate restructuring is coming up? It is vital to consider the potential 2023 taxable payroll when analyzing VC profitability and not merely use the 2022 figures. Oh…and all states have strict timelines to submit voluntary contributions, some as tight as 30 days from when the rate notice is mailed. Keep an eye out for the notice and don’t miss an opportunity because of misplaced mail!
Joint SUI tax accounts are available for consideration in 9 jurisdictions but have some serious pros/cons associated with them depending on the state. A joint account allows a group of employers (typically commonly owned/controlled employers) to comingle their unemployment reserves into a single SUI tax rate for some lock-in period (more on that to come). The goal is to reduce the overall SUI tax rates applied to all employers in the group such that the decrease to some employers creates savings in excess of any increase in rates imposed upon other employers. Similar to the voluntary contribution calculation, profitability is dependent upon taxable wage expectations for the upcoming year.
Joint accounts in most states come with an inherent risk in that the joint account is locked in for a period of from 2 years to indefinitely, meaning that unemployment claims and reserve account activity in one entity in the consolidation will impact ALL members of the group. Ohio is the sole single year joint account state with no down-the-road impact. It is important to be very careful in implementing a joint account since a one-year savings for one entity can often be negated, or worse, in the event of a business downturn in another entity.
SUI Tax Rate Notice Reviews
While it sounds simple, many organizations do not review their issued rate notices and assume they are accurate. With the upheaval of the past few years incorrectly applied quarterly returns/taxes or misapplied benefits can have a dramatic impact on your current year SUI tax rate. In most cases an employer only has 30 or so days from mailing to review and appeal rate notices that are issued. For at least your larger states of employment, these notices should be reviewed timely and, where an issue is identified, appealed in accordance with state requirements.
Year End Consolidations
Many organizations will choose calendar year end to effectuate internal reorganizations or external integrations to take advantage of the ease of a January 1 reporting date and to avoid restarts of federal and state taxable wage bases. This, of course makes sense from a tax, systems and organizational standpoint. Keep these points in mind if you are undergoing such an integration:
· As a result of the SUTA Dumping Act of 2004 and subsequent state legislation, transactions involving transfers of employees between commonly controlled entities almost always require specific state unemployment reporting and consolidation of SUI tax rates. It is extremely important to correctly complete transactional documents to properly report the employee movement to the SUI tax authorities to facilitate the proper application of the successorship provisions and to avoid any SUTA Dumping allegations.
· Be prepared for rates to change post-transaction, sometimes months later retro to 1/1/23. Generally SUI tax is accrued either at the new business rate or the general successor rate, although large scale employee transfers may warrant the projection of successor/consolidated post-transaction rates to avoid underpayments.
· Although most states will assign successorship when employees transfer between related entities, Wisconsin has been uniquely restrictive in cases where the organizations cannot show that either a) assets have transferred as part of the transaction and/or b) business activity as transferred. The Wisconsin Department of Workforce Development (DWD) generally will bar successorship if only employees transfer, resulting in either a new employer being established, or the employee movement being barred. Proper planning and execution should mitigate this issue if considered on the front end of the transaction.
While there are myriad payroll issues to be concerned with as we approach calendar year-end, savings opportunities may still exist if you are looking for them!