HR Compliance Responsibilities Regarding State Unemployment Insurance

State unemployment insurance (SUI) is like car insurance. You have it, but you don’t think about it every day. Likely, you don’t want to deal with it, so you leave that up to your insurance agent. However, you know if you’re in an accident, it’s there for you to use—but that your rates will go up. 

SUI is an insurance bucket employers contribute to automatically, but don’t spend much time thinking about. Employers, or HR, only think about it in the event that they must terminate an employee who then seeks unemployment. If too many former employees use unemployment benefits, then employer rates can increase.

However, there is an important consideration of SUI that HR professionals may want to make note of: compliance. But first, let’s cover what SUI is, how its tax rate is determined, 2023 rates for each state, and what HR should and shouldn’t worry about regarding it. 

What Is State Unemployment Insurance?

State unemployment insurance (SUI) is the money the government acquires through a wage tax on employers, also called a state unemployment insurance tax. Wages are taxed only up to a certain amount specified by the state for each calendar year. This is known as the annual taxable wage base.  

Employers are legally obligated to pay the SUI tax, but calculations may differ depending on the state and the employer's experience levels, as well as some other factors that are covered in the next section. In the states of Alaska, Pennsylvania, and New Jersey, employees are also required to pay SUI tax. 

You may recognize this tax by several different names: 

• State Unemployment Tax Act Tax, or SUTA tax 
• Employment security tax 
• SUI tax  

The money collected by this tax is contributed to the State Unemployment Trust Fund, within the Federal Unemployment Trust Fund, from which unemployed persons can receive short-term benefits. This fund is intended to help unemployed people cash-flow their expenses until they secure a new job. 

Who Is Eligible for Unemployment? 

To be eligible for the SUI fund, one must be terminated due to layoffs or reasons unrelated to any misconduct. Those who quit voluntarily and those who are not actively searching for new work are not eligible. 

How Are SUI Tax Rates Determined?

Calculating the SUI tax for an employee is deceptively simple at first glance. All states use the same base formula: 

Wage Base x Tax Rate 

Another consideration is that while the wage base is the same across each state, the tax rate may differ from organization to organization. The tax rate for each employer is determined by these factors: 

• The organization’s age
• The organization’s industry
• The organization’s turnover history 
• The organization’s unemployment claim history  

Your organization’s turnover history and unemployment claim history are known as an employer’s experience rating. It’s known as such because the tax rate is calculated depending on an employer’s “experience” with the state’s unemployment fund.  

The type of experience rating method differs from state to state. Some states may use the variations in payroll method, like Alaska, or the benefit ratio, like Alabama. Here is a list of methods the Department of Labor (DOL) approves states to use as defined by the DOL: 

• Reserve Ratio Formula: The earliest and still most common experience rating formula is a cost accounting system. Each employer’s record enters the amount of its payroll, contributions, and benefits paid to its workers. The benefits are subtracted from the contributions, and the resulting balance is divided by the payroll to determine the size of the balance in terms of the potential liability for benefits inherent in wage payments.  Rates are assigned according to a schedule of rates for a specified range of reserve ratios. The higher the ratio, the lower the rate. 
• Variations in Payroll: A decline (or increase) in an employer’s payroll is used as a measure of an employer’s risk with respect to unemployment. Benefit payments and separations are not used in calculating an employer’s tax rate under this system. Only one state, Alaska, currently uses this experience rating system.  
• Benefit Ratio: The ratio of benefits charged divided by the employer’s payroll is the index for rate variation, without taking contributions into account. Rates are assigned according to a tax schedule. This is the second most common experience rating system used by states. 
• Benefit-Wage Ratio: This system is radically different from the other three experience rating systems. A benefit-wage ratio is determined for each employer. The ratio is the total wages paid in the base periods of employees who drew benefits over the previous three years divided by the employer’s total payroll over the same period. In order to determine an individual employer’s rate, the employer’s experience factor is multiplied by the state experience factor (the percentage relationship between total benefits paid and total benefit wages in the state during the previous three years). Only two states, Delaware and Oklahoma, currently use this experience rating system.   

This language is taken directly from the DOL. For more information, check out the DOL’s guidance on employer experience ratings.  

BerniePortal is based in Tennessee, one of 31 states using the most common method, the reserve-ratio formula, to determine SUI tax. 

In the case of SUI tax, a reserve ratio is the annually calculated percentage of an employer’s deposits that must be maintained at a certain level. For employers, the reserve ratio determines that the unemployment fund is sufficiently supplied in case of a sharp increase in unemployment levels. The reserve-ratio formula is:  

Reserve Requirement = Deposits × Reserve Ratio

So if an organization’s former employees are often seeking unemployment benefits and are awarded them by the state, that will count against the business’s experience and negatively affect its tax rate. 

An organization wants its employee experience rating to be low. If it has high turnover or many unemployment claims against it, a company will have a higher rate and will therefore pay more in SUI tax.    

What Tax Rates Does Each State Offer for SUI?

SUI is different within each state due to differing tax rates. Be sure to check the rates for your own state and to refer to your tax professional if you have questions or concerns.  

Here is an interactive map of 2023’s SUI tax rates. Mouse over each state for information regarding each state's wage base as well as minimum and maximum rates.  

Should HR Calculate SUI Tax Rates?

Ultimately, HR Parties of One shouldn’t be putting SUI taxes on the top of their priority list. Payroll taxes are automatically withheld if an employer uses any sort of system. In the event an employer doesn’t have a payroll provider or an all-in-one HRIS platform, HR would need to refer to their accountant for any questions. 

As HR, if your tax professional informs you that your SUI tax rate has risen significantly, then you may want to consider the factors causing that increase, such as a recent slate of lay-offs. If you plan to lay off employees, recognize that it will impact your tax rate and prepare accordingly. Your tax professional will have more information on how employers should consider SUI taxes when planning lay-offs.  

So, much of this has to do with your accountant, and not you as HR. What should HR know about SUI? 

The answer: how to stay compliant. 

How to Stay Compliant with Unemployment Requirements 

Compliance is critical to organizational success. When it comes to state and federal unemployment, as HR, you may be familiar with the compliance requirements for your organization. The major need-to-know item is Form 940, in which employers report the difference between unemployment taxes owed the previous year and how much they have already paid

As another example, some states require a Notice of Separation to be delivered to a terminated employee. In the state of Tennessee, HR professionals must have this letter sent to the former employee within 24 hours. States have different requirements, but that’s just one of the first items that should be on your offboarding checklist. Another item is collecting the former employee’s meeting documentation.  

If an employee is terminated from your organization and, months down the line, seeks unemployment, the state agency will contact you to figure out why the former employee was terminated. You have a chance to respond and hopefully affirm that there was a good reason for termination, which would inform the agency that the former employee isn’t eligible for unemployment benefits. 

But how do you prove your case?   

What to Do When a Former Employee Files for Unemployment

Document, document, document. Document everything.  

When managers meet with their direct reports on a regular basis, ensure that each side is carefully providing an agenda for the meeting as well as a follow-up to recap what was discussed. By doing so, your employees will create a paper trail, so if a former employee who was rightfully terminated seeks unemployment, you have evidence supporting your case.  

For example:   

Consider if you terminate an employee for poor performance or even someone who committed gross misconduct. They should not be eligible for unemployment benefits. However, say they do seek unemployment benefits, and your organization gets a call from the state office.  

If you use an HRIS to keep meticulous records, then it’s a simple push of a button to review weeks, months, or even years' worth of evidence that proves an employee did not meet their performance expectations, which led to their termination. And since you can require employees to document a recap of their discussion, you will also have the former employee’s own words confirming their acknowledgment of their declining performance.  

Ideally, you can use an all-in-one HRIS’s performance management feature as a place where employees create detailed records for you. By requiring employees and their managers to document their regular meetings in your HRIS, they will build a comprehensive record that you can review at any time, helping you support managers and employees—while protecting your organization from potential liability. This is also called a continuous performance management plan.

For example, let’s look at how BerniePortal uses our performance management feature: 

BerniePortal’s performance management feature is one of our HR professional's best tools to keep their finger on the heartbeat of our organization. If they judge a steady decline in a whole team’s performance when reviewing team members’ one-to-one meeting notes, they know to speak to the manager to evaluate the underlying causes of the issue. 

If the manager is experiencing difficulty coaching their team through this time, HR can direct them to extra management training so the manager improves and can then help their team improve. This supports the manager’s and employees' development while providing a solution to a tricky situation that may have been identified too late without the help of a performance management feature. 

Our performance management feature also enables them to support managers better in other ways. Have you ever had a manager terminate someone without your support, knowledge, or approval? It’s frustrating because you may have had a better solution—and you may now need to prepare for a tangled compliance mess if that employee was terminated unreasonably. You should be involved in terminations to prevent compliance issues, and the first step is to get in on the ground floor of performance management. 

To learn more about how a performance management feature can help you maintain compliance, speak with an expert today.  

Additional Resources

You can stay informed, educated, and up to date with important HR topics using BerniePortal’s comprehensive resources:

• BernieU—free online HR courses, approved for SHRM and HRCI recertification credit
• BerniePortal Blog—a one-stop shop for HR industry news
• HR Glossary—featuring the most common HR terms, acronyms, and compliance
• Resource Library—essential guides covering a comprehensive list of HR topics
• HR Party of One—our popular YouTube series and podcast, covering emerging HR trends and enduring HR topics