Ask the Expert: Why Is My Unemployment Tax Decreasing?

A big thank you for all of the recent payroll tax question submissions! We are back with the second installment of “Ask the Expert”. This month we will be answering the question, “Why has my state unemployment tax been decreasing lately?”. For many companies, there will be a noticeable decrease in state unemployment liabilities starting with second quarter. Although it can seem like an Oprah style surprise gift (don’t race to look for that car key under your seat), it is a result of how the wage base works.

Unlike other payroll taxes, states do not impose a “blanket” unemployment rate for all companies. Unique rates are assessed for each company operating in the state that are determined by various factors including past unemployment claims by former employees. These rates can change on an annual basis. Along with the assigned rate, a defined wage base is used to calculate the taxes. The wage base is determined at the state level and is applicable to all companies with unemployment tax. Like the unemployment tax rate, the wage base can change on an annual basis. For example, the 2018 unemployment wage base for the state of Virginia is $8,000. What this means is for every employee that is applicable to state unemployment tax, a company will be charged tax on the employee’s wages up to $8,000. If a company’s Virginia unemployment rate is 2.7%, this would mean the unemployment tax owed for each employee would be $216 for the year given the $8,000 wage base. Regardless if an employee earns $200,000 or $45,000 annually, unemployment tax will only be charged on the first $8,000 of wages. If an employee’s annual earnings fall below the wage base (let’s say $5,000 in this case), they would be taxed on 100% of their wages.

Since the wage base acts like a tax cap, it is normal to see liabilities decrease in latter parts of the year if there is not a high rate of turnover within a company.

We hope you enjoyed reading! If you would like to see your tax question answered in next month’s edition of “Ask the Expert”, please send us a message at asktheexpert@dominionpayroll.com.