Unemployment insurance tax rates will be much higher next year

By: Kriss Sjoblom
5:30 pm
August 31, 2020

Unemployment insurance tax rates are adjusted annually and will be much higher next year.

Most employers qualify to participate in the experience rating system. Under this system each employer is assigned to one of forty rate classes, based upon its benefit ratio, which is calculated by dividing total benefits charged to the employer’s account by the employer’s taxable wages over a forty-eight-month period. (For taxes on wages paid in 2021, the benefit-ratio period is July 1, 2016 to June 30, 2020.) A statutory formula that depends upon the balance in the trust fund and other factors determines a tax rate for each rate class.

The table below shows the current tax schedule and my estimates as to what the schedules will be for years 2021 through 2025, based on the trust fund forecast prepared by the state employment security department (ESD) in June.

There are several different ways to calculate average tax rates. One way is to weight each rate class equally. I am able calculate this simple average, which is shown in the next to last line in the table. By this measure, the average rate will increase in from 2.79 percent in 2020 to 3.85 percent in 2021 and 2022, and then declines thereafter.

However, this simple average does not represent the experience of either the average employer or the average employee because employers and employees are not distributed uniformly across rate classes. Moreover, many employers will see significant impacts in 2021 and 2022 due to movements to higher rate classes.

A more representative average tax rate is calculated by dividing the total taxes paid by employers by the total amount of wages subject to tax. The ESD trust fund forecast reports such an average, which is shown in the bottom row of the table. The ESD-calculated average tax rates increase from 0.94 percent in 2020, to 1.88 percent in 2021 and 2.74 percent in 2022, and then decline thereafter.

Note, however, that these averages are derived from ESD’s trust fund forecast and relate to tax payments made in the indicated year rather than tax obligations incurred in that year.

Taxes are levied quarterly and are due on the last day of the month following the quarter, e.g. taxes on employment during the last three months of 2020 are due on January 31, 2021. Tax revenue received by the UI trust fund in 2021 will be based on wages paid in the last quarter of 2020 and the first three quarters of 2021.

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