IBA PROFIT REPORT - 2602

prepared by:  Independent Business Association

REDUCING YOUR UNEMPLOYMENT TAX

USING "VOLUNTARY CONTRIBUTIONS"

Employers who have an increase of 6 or more unemployment tax rates from one year to the next may "buy down" their future unemployment tax rate by making "voluntary contributions".  This legislation IBA developed and successfully got put into law in 1996.
Here is an example of how this law works:

Small Business A lays off an employee in 2001.  That employee qualifies for and collects $4500 in unemployment benefits in 2001.  In November 2002, Small Business A receives their 2003 unemployment tax notice and sees their unemployment tax rate will increase from the current level of .5% to 3.5%..  This is an increase of 16 rate classes from Small Business A's 2002 unemployment tax rate, to its new 2003 rate. 

Small Business A then calculates the cost of this higher tax rate as follow:

· Find the difference between your old tax rate and your new tax rate:

3.5% - 0.5% = 3%

· Multiply the difference by your total taxable payroll (in 2003 the first $29,700 of each employee’s earnings) in the following years:

Year 1 - $125,000 x 3% = $3750

Year 2 - $150,000 x 3% = $4500

Year 3 - $150,000 x 3% = $4500

Year 4 - $175,000 x 3% = $5250

Total $18,000

But, Small Business A can avoid this additional $18,000 in additional unemployment taxes over 4 years by using the state's "voluntary contributions" law.  To use this law, Small Business A can make a "voluntary contribution" of up to the full amount of the $4500 unemployment claim charged against their account, plus a 10% surcharge, to "buy-down" this claim and reduce their future tax rates.  If Small Business A were to make a "voluntary contribution" of $4950 ($4500 + the 10% surcharge ($450)), they would remain in the same unemployment tax rate bracket they were in 2002 - and NOT pay the $18,000 in additional unemployment taxes.

Small Business A may not want to "buy-down" the entire $4500 claim, but may want to buy down $2500 of the claim by making a "voluntary contribution" of  $2750 ($2500 + 10% surcharge).  Small Business A's tax rate would be decreased some, maybe to 2% instead of 3.5% (tax rates used here are only for illustration and not examples of an actual case) and instead of Small Business A paying $12,000 in additional state unemployment taxes over the next 4 years, Small Business A would pay $8,000 in additional state unemployment taxes over the next 4 years, saving $10,000 in additional taxes for a $2750 "voluntary contribution" expenditure.

Firms eligible for voluntary contributions should receive a notice from the WA Employment Security Department mid November prior to the year their taxes will be increased.   Making a "voluntary contribution" is optional.  An employer choosing to make a "voluntary contribution" must have the voluntary contribution received by the WA Employment Security Department by February 15th.