As a business owner, you certainly pay your fair share of payroll taxes. How do you keep track of your different tax rates?
One rate that can be complicated to determine is your state unemployment tax rate. Is it as simple as a ratio of taxes paid in and benefits paid out? Not quite.
At CSI Accounting & Payroll, we’ve worked with small business taxes for over 50 years. That means we’ve gotten a lot of questions about state unemployment tax, including:
- Does my business have a state unemployment account? (What about a federal one?)
- What do my unemployment tax reports show me?
- How do I calculate my state unemployment rate?
Does Your Business Have an Unemployment Account?
As a business, you pay state unemployment tax so your employees may be able to draw benefits if they become unemployed.
Contrary to popular belief, your business does not have a dedicated state unemployment account with a balance like a bank account. You actually have a tax account with a tax rate that gets adjusted periodically (usually once a year) based on certain factors, like when unemployment benefits are paid to your former employees and credited against your tax account.
It’s the same on the federal side; there is also no dedicated unemployment account for your business. In fact, employees don’t even draw from federal unemployment! The main point of federal unemployment is to supplement state unemployment offices when needed.
What Unemployment Tax Reports Reveal
All employers who pay state unemployment taxes will receive reports from their state unemployment office. (You will not receive federal reports since employees don’t draw federal unemployment benefits.)
What do these state reports tell you? They show how much unemployment tax you’ve paid versus how much has been distributed to former employees as unemployment benefits.
This ratio is important because it’s used to determine your experience rate portion of your unemployment tax rate. Let’s talk about how to calculate your rate in the next section.
How to Calculate Your State Unemployment Tax Rate
How much do you pay in state unemployment tax? Many states have their own rules (which can be found on your state government website, or you can ask your payroll specialist), but a general state calculation looks like this:
Unemployment tax rate = Your state’s base rate + (Your experience rate OR The new employer rate for your state and industry)
Not sure what a base rate, experience rate, or new employer rate are? No problem! Learn more about them below.
Note: We will be using Minnesota as an example since that’s where we’re headquartered, although we work with businesses across the United States.
What Is a Base Rate?
A base rate, or default rate, applies to all businesses in a certain state. Not all states use this, but many do – like Minnesota.
What Is an Experience Rate?
The experience rate is based on what’s shown in your report: taxes paid in versus how much has been paid out.
The formula is similar in many states. Here is the one for Minnesota:
Experience rate = (Benefits paid in the last 4 years / Taxes paid over the last 4 years) * 1.25
What if you don’t have an experience rate because you’re a new business? Then you would use your state’s new employer rate, which we discuss below.
What Is a New Employer Rate?
Some states’ new employer rates also vary by industry. Minnesota’s new employer rate is 1% - 8.9% for 2024.
Know Your Unemployment Tax Rate!
Payroll taxes can get complicated, especially when they vary by state and change each year. It helps to have an expert on your side to keep you in compliance.
Now that you know that your business doesn’t have an unemployment account with a balance, what state reports show you, and how to calculate your state unemployment rate, are you ready to check out payroll services?
If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
Not ready to talk? That’s okay! First, learn why doing your own payroll is a huge mistake.
