Retention Rates Reduce Taxes

Employee retention is a great way to reduce annual taxes on a business.

The unemployment insurance tax rate charged to employers is in part based on the number of unemployment claims against the company’s state unemployment account. So if an employer laid off several workers during tough times, it may actually have to pay more in taxes within three years.

Considered a tax on employers and an insurance benefit to employees, the state’s unemployment insurance tax charged to each firm is from 0.9 percent to 10.8 percent, calculated on a $10,000 wage base. The wage base has increased from $9,000 just two years ago.

Hugh Havens, assistant director for unemployment insurance for AESD, said the rate depends on employers’ annual average payroll dollar amounts. He said the AESD looks at employers’ three-year and five-year payrolls and determines the rate based on whichever is to the benefit of the employer.

As long as an employer has plenty of money in its SUTA, the rate goes down. If that money gets depleted through unemployment claims, the rate goes up.

Havens said the current annual maximum rate an employer would have to pay per employee would be 10.8 percent or a total of $1,080 per employee. He said the 10.8 percent rate is highly uncommon and has to be assigned by the AEDS.

“They would have been in bad, bad ratings for a number of years to get that rate,” Havens said.

The federal wage base is $7,000 at a set rate of 6.2 percent. But if an employer is in good standing, it can automatically get a 5.4 percent discount, Havens said.

That means most employers pay 0.8 percent per employee per year, or about $56 to the Fed. Havens said the federal money goes to pay for state-level unemployment administrative costs.

The average rate for employers across the state for 2003 was 2.37 percent, or about $237 per employee, Havens said. This means an average employer pays an unemployment insurance tax of about $293 per employee per year.

Travis Fink is owner of Paytime Inc., a full-service payroll company in Fayetteville. He said employment insurance tax is like a hidden cost that most new business owners don’t think about while starting up.

The state sets the minimum rate on new employers at 3.7 percent for three years, or $370 per employee. Coupled with the minimum federal tax, a new employer pays at least $426 a year for each person.

“It’s a huge effect — the average person has no idea how much the employer pays in taxes,” Fink said. “Most employers are blown away at the expense of running a business. And that’s just from the payroll side, not from operation expenses.”

Fink points to surrounding states and their rates and base wages. He said Missouri’s new employer rate is 3.5 percent on an $8,000 wage base, or $280 per employee; Oklahoma’s is 1 percent with a base of $14,300 or $143 per employee; and Texas is 2.7 percent with a base of $9,000, or $243 per employee.

All three of those states have lower maximum rates than Arkansas, the highest being Oklahoma with a 9.2 percent maximum.

Fink, who employs six people and described his tax rate as “favorable,” said employers should keep a sharp eye on the paperwork that comes from the state. He said he’s seen ex-employees claim benefits without just cause.

That’s a knock against the employer because it drives up the tax the state charges. But the fewer claims an employer has against their account, the better.

“That’s why it’s so important to reduce turnover,” Fink said.