ALERT - Minnesota Unemployment Insurance Tax: New Tax Rate Buydown ProvisionPrint PDFShare
When does it make sense for a business to make a prepayment of tax in order to benefit from tax reductions in the future? The general wisdom is to hold on to your money and pay as you go. However, because of a 2010 amendment, Minnesota businesses will want to seriously consider making an unemployment insurance tax rate buydown.
The current 25% surcharge for unemployment insurance tax will be waived for employers that make a tax rate buydown for the Minnesota unemployment insurance tax program, effective for calendar years 2011, 2012 and 2013. This recent 2010 Minnesota legislative carrot provides a substantial monetary incentive for Minnesota businesses to make a tax rate buydown in 2011. This incentive may result in a deep discount to an employer’s unemployment insurance tax if they pay early (by four years). The new law may save employers 30% over a four-year period in their unemployment insurance costs. The buydown provision should be considered by businesses that have laid off workers, have available cash and are thinking about expanding when the economy turns around.
How the Unemployment Insurance Tax Works
Minnesota taxes employers in order to provide unemployment benefits to laid-off workers. All state unemployment taxes are paid into the Minnesota Unemployment Trust Fund (Fund), which then makes the payments to laid-off employees. In 2009, the average amount paid by employers for an employee for the unemployment tax insurance was $410. This amount is expected to double by 2014.
The employer's payment into the Fund for its employees is based on a taxable wage base and at tax rates depending on employment history. On or before June 30 of each year, the Commissioner calculates a wage amount equal to 60% of Minnesota's average annual wage rounded to the near $1,000. For example, in 2010 the first $27,000 of taxable wage base is subject to Minnesota unemployment tax.
The taxable wage base is subject to a tax rate based on ranges from 0.10% to 0.50% plus 14% each year (which is the same for all employers) and which is then added to the individual experience rating for each business for the calculation of the unemployment insurance tax due from the business.
The experience rating is based on each business’s individual account experience. Factors included in calculating an experience rating for a business are the unemployment insurance benefits paid by that business and the taxable payroll for each year.
Employers are also required to pay additional monies on interest on funds borrowed by the Minnesota Fund from the Federal Unemployment Insurance Trust Fund.
Businesses do not pre-pay the cost of unemployment tax benefits received by laid-off employees. Rather, the unemployment insurance cost is actually post-paid. For example, 2008 lay-offs may impact a business’s unemployment insurance tax rate for four years or until 2014.
As indicated, the unemployment tax is “experience rated.” That is, the more laid-off employees collect, the higher the employer's future unemployment tax rate. The Minnesota statutes permit an employer to initiate a tax rate buydown to forestall an experience rate increase.
What is a Tax Rate Buydown?
A tax rate buydown is the process of submitting a payment by an employer to cancel all or a part of unemployment benefits paid charges in order to reduce its future unemployment tax rates. Employers, who are assigned an experience rating and have had benefits paid to former employees during the experience rating period, can make a buydown payment to cancel all or part of the unemployment benefits paid charges on their unemployment tax account, thereby reducing their future unemployment insurance tax rate. Employers, who make a buydown payment, will have their unemployment tax rate recomputed using the reduced amount of unemployment benefits paid.
How to Make a Tax Rate Buydown
A buydown payment:
- must be made within 120 days from the beginning of the calendar year for which the tax rate is effective and
- would normally include a 25% surcharge. For example, to remove each dollar in benefits, a payment of $1.25 is required. However, this 25% surcharge is eliminated by the recent 2010 amendment but only for years 2011 through 2013.
When a Tax Rate Buydown Makes Sense
The typical profile of a business that should consider the buydown provision is one that has laid-off workers, has sufficient funds available to make the buydown payment and contemplates expanding its business in the future.
To decide whether a buydown payment under the new law will save the employer money, the business should compare the cost of making a buydown payment to get a reduced tax rate to paying the unemployment insurance tax at their assigned tax rate. To do this:
- Calculate the total cost (benefits to be canceled without the 25% surcharge) of the buydown payment; then
- Add to that amount, the tax the employer would pay on their estimated total taxable payroll for the current year at the lower rate that would result from the buydown payment.
Benefit paid charges that are canceled by a buydown payment are permanently removed from the employer's account. Therefore, a buydown payment may provide tax savings for several years. The full effect of a buydown payment becomes apparent if the employer can estimate taxes payable for several years.
An employer can do an unemployment insurance tax rate buydown calculation by going to: www.uimn.org and clicking on Forecast Tax Calculator and Process Tax Rate Buydown.
Employers should seriously consider whether to make an unemployment insurance tax rate buydown in 2011 because of the incentive of eliminating the 25% surcharge. Businesses that have the right mix can benefit substantially from using the buydown.
For a PDF of this alert, click here.
This publication is circulated to bring useful and timely information to our clients and colleagues. The publication is for general information purposes only and is not legal advice. You should not rely on any information or views contained in the publication in evaluating any specific legal issues you may have. Please consult your Briggs and Morgan attorney for specific legal advice. Any U.S. Federal tax advice contained in this communication (whether distributed by mail, email or fax) is not intended or written to be used, and it cannot be used by any person for the purpose of avoiding U.S. Federal tax penalties or for the purpose of promoting, marketing or recommending any entity, investment plan or other transaction. (The foregoing legend has been affixed pursuant to U.S. Treasury Regulations governing tax practice.)