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What is SUTA Dumping?
SUTA (state unemployment tax act) Dumping is a tax evasion practice involving the manipulation of an employer’s unemployment insurance (UI) tax rate to achieve a lower rate, and thereby pay less UI taxes. Typically, SUTA Dumping occurs when a business transfers payroll out of an existing company or organization to a new or different organization solely or primarily to reduce UI taxes.
What is the harm in SUTA Dumping?
There are several ways in which SUTA Dumping harms employers and the state’s UI trust fund.
- Under the experience rated system, the UI tax rate is based on an employer’s history of benefit charges. With SUTA Dumping, an employer with a high UI tax rate attempts to hide behind a different company with a lower tax rate and unfairly shift their UI costs to other employers.
- SUTA Dumping creates a competitive cost advantage for employers practicing UI tax evasion.
- SUTA Dumping reduces money in Michigan’s UI trust fund, causing an increase in unemployment tax rates for all employers.
- SUTA Dumping reduces funds available to pay unemployment benefits to unemployed workers.
- SUTA Dumping puts those employers at a disadvantage who try to manage their work and maintain steady employment for their employees as SUTA Dumping allows charges that are never paid for by the business.
- SUTA Dumping rewards employers for dumping their UI responsibility for past benefit charges on the rest of employers.
Although only a small percentage of employers are involved in SUTA Dumping, all employers are impacted because the “escaped responsibility for benefits paid” ends up with the rest of Michigan’s employers.
What are some examples of SUTA Dumping schemes?
- New corporation or partnership that performs the same business often in the same place often with the same employees but without an appropriate successorship to the previous company
- A new holding or subsidiary company arrangement without successorship
- Transfers of payroll from one regional account to another regional account to lower the overall tax rate without successorship
- Transfers of payroll between functional (sales, manufacturing, administrative) accounts to achieve a lower tax rate without successorship
- Purchase of a business for the purpose of becoming a successor for the lower tax rate. The purchased business can then be liquidated, or the nature of the business can be changed
- Payroll Parking – The use of another company’s UIA account for reporting payroll at a lower tax rate. This is often done with a leasing company using the UIA account of their clients. It can be done without the client company’s knowledge. A 1020 with payment will automatically reactivate the client’s inactive UIA account
- Selling of a FEIN- Purchase of the corporate identity without any assets or business.
What is the penalty for engaging in SUTA Dumping?
If you participate in a SUTA Dumping practice and are discovered, you run the risk of paying a penalty that would amount to four times any savings you would have received by manipulating your tax rate, if it is found to be intentional. Your UI tax rate would also be increased to the maximum tax rate (but not less than a 2% increase), for the year in which we determined that you engaged in intentional SUTA Dumping, and for the next three years. A civil penalty of up to $5,000 will apply if a person simply advises another business to participate in SUTA Dumping and is not an employer.
To report SUTA Dumping
Click the Report Fraud link on this website. All allegations of fraud are taken seriously. Please provide as much information as you can, including:
- Employer name, address, and telephone number
- Employer account number
- What you suspect they are doing
- When they started doing it
- Your name, address and telephone number (Optional)
Our Office of Employer Ombudsman is also available to answer your questions about SUTA dumping and to provide you with more information. Contact OEO at 1-855-4UIAOEO (1-855-484-2636).
SUTA Dumping Legislation:
Act No. 19 of the Public Acts of 2005