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If you have employees, chances are you have to pay state unemployment insurance taxes. Exactly how much you'll pay will depend on where your business is located and how much you're paying your employees.
Penny pinching employers may be thinking they can reduce that tax burden by cutting back on their employees' hours, but does it necessarily work out that way? Here's a look.
Recent state unemployment tax numbers can show how much the amount can vary from state to state. New York's 2017 rate is 4.1% of an employee's wages, with the amount taxed per employee capped at $10,700 per year. By contrast, Texas taxes at 2.7%, capping the maximum per employee dollar amount at $9,000. So if you've got an employee earning $30,000 a year, you're paying around $1,230 per year in the Empire State, but just $810 in the Lone Star State.
It's important to note that state unemployment rates will also vary depending on how often you hire and fire employees, as well as how many of your employees who have been fired receive unemployment benefits. You should receive a new rate towards the end of each year. (If you don't, you should contact the state employment development office.)
So can you reduce the amount you owe by reducing your employees' hours? Maybe, but maybe not. Employees who have their hours reduced may still be eligible for partial unemployment benefits, which are typically calculated as a portion of the wages that they would have received if they were fully unemployed. Additionally, employees may also be eligible for unemployment benefits if they quit as a result of a significant reduction in hours. The reduction required for unemployment qualification can also vary by state -- in Washington an employee is eligible if an employer reduces their usual pay or hours of work by 25 percent or more.
Because your unemployment tax rate will vary depending on how many of your current or former employees receive unemployment benefits, scaling back their hours and wages may not necessarily decrease your tax burden, especially if you cut them back to the point of effectively firing them.
Significant reductions in hours and pay can have a significant impact on employees, and some states have specific notice requirements when cutting back employee hours, so you may want to consult an experienced employment attorney before cutting hours for your staff.