Peter Limone, CPA, CGMA – President and CFO
There are tactics any company can use that will undoubtedly save unemployment costs across the board for your company. But first, a little background on employer of record and what it means. An employer of record such as Innovative Employee Solutions provides human resource services, payroll, back office support, security clearance, pre-employment screenings, and independent contractor compliance. They assume administrative responsibility for your contingent workers through the entire hiring and payroll process. This lowers your overhead costs, eliminates your time spent on paperwork, and frees you from the risks and burdens of payroll management.
An employer of record keeps current with all tax and employment law changes to prevent serious legal and financial threats to your company. All processing, paying, and administering benefits for your sourced employees are handled. In addition, detailed background checks are performed as well as drug screens, and security clearances if necessary. A good employer of record will also determine whether an independent contractor meets 1099 guidelines to prevent misclassification penalties. In addition, all benefits such as health insurance, dental and 401K are provided by the employer of record.
So how does this help save on unemployment costs? When an assignment ends or you have a layoff, typically the former employee will apply for unemployment benefits. The state administers these benefits. As benefits are paid, the state will keep track of these in an account specifically for your company. When more benefits are paid it counts toward your company’s State Unemployment Insurance rate.
As a way of example, Minnesota’s rate calculation follows:
Unemployment benefits paid for the past year are multiplied by 1.25 then divided by the taxable wages for the same year. This results in your company’s experience rating. They then add a base tax rate to come up with your company’s unemployment tax rate prior to adding any additional assessments.
Armed with the above information, we can now reveal how to keep your unemployment tax rate low. Here are three tactics you can use to prevent your rate from increasing:
First, use an employer of record (also known as payrolling) for a probationary period for new employees. Typically companies have a 90 day period where they are ensuring the new employee is going to fit in and add value to the organization. If the employee does not work out and they are terminated, the unemployment tax rate can go up. If you are using an employer of record, the unemployment benefits paid will count against the employer of record. If the employee works out, you can convert them to your payroll without a fee. Typically payrolling companies do not charge a conversion fee.
Second, use an employer of record for your seasonal workers. If you are in a business that needs to increase the workforce for seasonal purposes, you know that once the season is over and you lay them off, their unemployment benefits will increase your unemployment tax rate. You can avoid this by payrolling these employees. As an added benefit, an employer of record is adept at on boarding quickly so you can avoid headaches from administrative delays in hiring.
Third, you can use the same tactic for project workers and for paid interns. The idea is the same, project worker or interns are working for your company for a specific period of time and when the project is completed they are terminated. Why should the unemployment benefits cause an increase in your company’s tax rate?
If you’re thinking that these are small savings, think again. When your company’s unemployment tax rate increases, it increases for your entire payroll. If you are a CFO, controller, or accounting manager, I urge you to do the calculations and see for yourself.
Using an employer of record is a time-saving, cost effective way to increase your company’s bottom line. For more information on choosing Innovative Employee Solutions as your Employer of Record, visit our website and get ready to save some money.
