Unemployment Tax Rate
What the law says: This issue is covered by Section 19 of the Michigan Employment Security Act. The law provides that all private for-profit employers, and all non-profit employers except those choosing to pay "reimbursements" (dollar-for-dollar payments to the UIA for benefits paid out) will pay unemployment taxes based on a tax rate calculated by the UIA . There are three "components" of the unemployment contribution (tax) rate: the Chargeable Benefits Component (CBC), the Account Building Component (ABC), and the Nonchargeable Benefits Component (NBC).
The law says that if an employer is a "contributing employer" (responsible for the payment of a quarterly unemployment tax), and if the employer is newly liable (that is, is not a successor to an existing business) then the employer's unemployment tax rates will be as follows:
- For the first year of liability = 2.7%
- For the second year of liability = 2.7%
- For the third year of liability = 1/3 CBC + 1.8%
- For the fourth year of liability = 2/3 CBC + 1.0%
- For the fifth year of liability and beyond = CBC + ABC + NBC
The "year of liability" is determined by when the business started to operate, by the original owner.
For an employer in the construction industry, the rate for the first two years is the average construction contractor rate; for the third year it is 1/3 of the CBC + 2/3 of the average construction contractor rate; for the fourth year it is 2/3 of the CBC + 1/3 of the average construction contractor rate.
These three components are calculated as follows:
Chargeable Benefits Component (CBC)
60 months of benefits paid
60 months of taxable payroll
The 60-month periods each end the previous June 30
Account Building Component (ABC)
[(Required Reserve) minus (Actual Reserve)] X 0.5
Total payroll for 12 months ending last June 30
The Required Reserve is figured by taking total payroll for the 12 months ending the last June 30th and multiplying it by 0.0375, which is called the "cost criterion." The Actual Reserve is figured by taking all tax payments (except those paid for the Nonchargeable Benefits Component) since the business began, and subtracting from that all benefit payments since the business began. The result could be a negative number. If so, the Actual Reserve must be added to the Required Reserve, in the formula given above.
Nonchargeable Benefits Component (NBC)
This component is the only one of the three components of the unemployment tax rate that does not reflect an employer's own experience. This component is generally a flat 1.0% for all contributing employers with five or more years in business. However for employers with no, or very few benefit charges, the Nonchargeable Benefits Component (NBC) can be lower than the standard 1.0%. The following reductions apply:
- The NBC is 0.5% if the employer had no benefit charges in the 5 years ending the prior June 30th or has a Chargeable Benefits Component under 0.2%.
- The NBC is 0.4% if the employer had no benefit charges in the 6 years ending the prior June 30th.
- The NBC is 0.3% if the employer had no benefit charges in the 7 years ending the prior June 30th.
- The NBC is 0.2% if the employer had no benefit charges in the 8 years ending the prior June 30th.
- The NBC is 0.1% if the employer had no benefit charges in the 9 years ending the prior June 30th.
Across-the-Board Tax Reduction
If the amount in the Unemployment Insurance Trust Fund is at least 1.2% of the total payrolls of all contributing employers for the last 12 months, each employer's unemployment tax rate will be reduced by whichever of the following methods results in the lower tax rate:
- Deduct 10% from each component (ABC, NBC and CBC) of an employer's unemployment tax rate and then add together the reduced components, or
- Deduct 0.1% form the employer's total unemployment tax rate
This does not apply to an employer already at the minimum tax rate for the year, or to an employer with fewer than four consecutive years of liability under the Act.
Amount of Quarterly Tax Payment
The tax rate applicable to an employer in a calendar year is multiplied against the first $9,000 of each covered employee's gross wages paid in the calendar year. This $9,000 amount is called the "taxable wage base."
Examples: Form UIA 1771 (Tax Rate Determination ) gives all the information the employer needs to calculate the unemployment tax rate. Employer A's Form UIA 1771 showed the following numbers:
ACTUAL RESERVE: 41,532.00
TOTAL PAYROLL (12 Months): 2,428,871.34
REQUIRED RESERVE: 91,082.68
TAXABLE PAYROLL (60 Months): 2,972,332.91
BENEFIT CHARGES (60 Months): 32,869.00
Chargeable Benefits Component:
The calculation is done this way:
60 months of benefit charges
60 months of taxable payroll
Taking the sample numbers from above:
32,869.00 = .0110 = 1.1%
The result is rounded to the next higher 0.1%. (In this example, the fourth decimal place was a "zero," and no rounding was done.)
Account Building Component:
The calculation is done this way:(Required Reserve) - (Actual Reserve) X 0.25
12 months of total payroll
Taking the sample numbers from above:(91,082.68 - 42,532.00) X 0.25 = .0051
If there is any remainder (as there is here with the "1" in the fourth place to the right of the decimal), the result is rounded up to the next higher 0.1%, making the result 0.6%.
Nonchargeable Benefits Component:
This component is 1.0% for all contributing employers, but can be as low as 0.1% by 1999, for employers with no benefit charges against their account for 9 years.
Unemployment Tax Rate:
For an employer with five or more years of business experience, the unemployment tax rate is computed by adding together the three components:
- Chargeable Benefits Component: 1.1%
- Account Building Component 0.6%
- Nonchargeable Benefits Component: 1.0%
(or as low as 0.1%, if appropriate)
UNEMPLOYMENT TAX RATE: 2.7%
The tax rate is mailed to employer yearly on Form UIA 1771. This notice is a determination and can be protested/appealed like any other determination. The time period for filing a protest or appeal from a rate determination or redetermination is 30 days from the date of mailing, the same as for all other determinations and redeterminations.
Proof at the Hearing: The UIA has the burden of proving the accuracy of the calculation, and of the numbers used to make the calculation. The employer can bring business records to disprove the UIA.
For Further Help: The Unemployment Insurance Agency (UIA) Advocacy Program can provide assistance to employers in preparing for Administrative Law Judge and Board of Review hearings on this issue. Call 1-800-638-3994.
The information on this sheet is intended to provide a general understanding of the subject matter. It does not have the force of law or regulation.