Have you ever considered ways to manage your payroll taxes? One good way to keep employer paid payroll taxes down is to manage your employee turnover. Each employee has related payroll tax expenses. On the first $8,000.00 in wages, for Alabama, and on the first $7,000.00 in wages, for Federal, you are taxed as the business for State Unemployment (SUI) and Federal Unemployment (FUTA). If you have the lowest Alabama rate and pay all of your SUI on time that is currently $142.00 per year per employee. Consider this, if you have turnover, each new employee starts this taxing process again. You pay another $142.00 on the first part of their wages. If you are at a higher State Unemployment rate or if you have a significant number of employees, this can get expensive quickly.
Here are some examples:
Company A has 50 employees but little turnover so they pay just 50 times the SUI and just 50 times the FUTA. They are at the lowest rate for Alabama in 2012. All of their employees make more than $8,000.00. They would pay $5,000 in SUI (50×8000=400,000×1.25%) and $2,100.00 in FUTA (50×7000=350,000x.6%) for total unemployment taxes of $7,100.00.
Company B has 50 employees but they have high turnover so they pay SUI and FUTA on 75 employees throughout the year because of this turnover. They are at the lowest rate for Alabama in 2012. All of their employees made more than $8,000.00. They would pay $7,500.00 in SUI (75×8000=600,000×1.25%) and $3150.00 in FUTA (75×7000=525,000x.6%) for total unemployment taxes of $10,650.00.
They will also have a rate increase for Alabama for SUI for 2013 due to the unemployment claims filed. This rate will be high for the next three years because Alabama uses a ratio of wages to unemployment claims and uses three years of data! This is often a missed or forgotten cost of turnover. We all know that unemployment claims can hurt a business however there is a direct cost. The higher rate for 2013 will be applied to all employees so even if the 2013, 2014 or 2015 turnover is low, the tax paid will be higher.
Let’s look at Company B for 2013 assuming that the SUI rate went up only 1% and the turnover was low. They would pay $9,000.00 in SUI for 50 employees (50×8000=400,000×2.25%) so as you can see even with less turnover they are paying for the 2012 turnover into the next year. Remember Company A only paid $5,000.00 in SUI on 50 employees because of the low rate!
When you make decisions about hiring, layoffs, furloughs and terminations, take a minute to consider the cost of the turnover. When you make decisions about insurance plans or other employee benefits, remember to calculate a realistic cost of turnover (or benefit of retention) into your cost analysis. If you need help with this process, please contact your JamisonMoneyFarmer PC accountant. We will be happy to assist you.