- Since March 2020, at the outset of the COVID-19 pandemic, 113 million people have filed claims for unemployment. The impact on employees and businesses alike has been unlike any most of us have ever seen.
- When launching and running a startup, founders must understand how unemployment claims impact their company, whether in times of a pandemic or not.
- Unemployment benefits result from a federal-state program and are funded based on federal unemployment tax (FUTA) and state unemployment tax (SUTA), both typically paid solely by the employer.
- If eligible employees file for and are approved for unemployment benefits, the employer can experience higher SUTA tax rates.
- To calculate FUTA taxes, multiply your startup’s taxable wages paid by 6 percent. If you pay your SUTA taxes on time, you may receive an offset credit of up to 5.4 percent, regardless of what you pay to the state.
- To determine your startup’s SUTA rate, you can contact your state's unemployment insurance (UI) website. This rate can vary based on the wages you paid and the number of successful unemployment claims that have been approved for your former employees.
- When an eligible employee gets an unemployment claim approved, the cost to the employer exceeds the claim itself. Once a claim is approved, a former employee may be able to collect up to twenty-six weeks of benefits in most states, directly impacting the employer’s premium UI rate.
- Startups and small employers should take proactive steps to protect themselves when it comes to unemployment claims.
Since March 2020, at the outset of the COVID-19 pandemic, 113 million people have filed claims for unemployment, dwarfing claims filed during the Great Depression. The impact on employees and businesses alike has been unlike any most of us have ever seen.
When launching and running a startup, founders must understand how unemployment claims impact their company, whether in times of a pandemic or not. Some businesses view unemployment claims as a cost of doing business, where others attempt to mitigate the effects of such actions by challenging the claim, potentially preventing the payment of such benefits.
In this article, we’re going to walk you through the impact that an unemployment claim could have on your startup.
What are unemployment benefits?
Unemployment insurance provides benefits to eligible employees who have lost their jobs due to no fault of their own, such as layoffs, furloughs, or lack of available work. Additionally, these affected employees must meet additional requirements related to wages earned or time worked for the employer. Essentially, unemployment benefits constitute a portion of an employee’s past salary used to support them as they look for a new job.
These insurance benefits are regulated by the federal government, the Department of Labor, and the states. Each state “administers a separate unemployment insurance program, but all states follow the same guidelines established by federal law.” Since each state sets its own guidelines, affected employees must review the rules for the state where they were employed.
Since unemployment benefits result from a federal-state program, these benefits are funded based on federal unemployment tax (FUTA) and state unemployment tax (SUTA). FUTA, which employers generally pay, is contributed to a federal fund, allowing the federal government to oversee the state’s management of unemployment benefits.
As you might expect, SUTA is collected by the states and directly pays employees qualifying for unemployment benefits. SUTA is also generally paid by employers. Certain employers may be exempt from paying these taxes, such as tax-exempt organizations.
Let’s look at some specific numbers:
To calculate FUTA taxes, you would multiply your startup’s taxable wages paid by 6 percent. The taxable wage base equals the “first $7,000 paid in wages to each employee during a calendar year.” If you pay your SUTA taxes on time, you may receive an offset credit of up to 5.4 percent, regardless of what you pay to the state. Depending on the state where your startup operates and any offset applied, you could pay an effective FUTA tax of 0.6 percent (6 percent – 5.4 percent = 0.6 percent).
For your startup’s state unemployment tax rate, you can contact your state's unemployment insurance (UI) website. Remember, this rate can vary based on the wages you paid and the number of successful unemployment claims that have been approved for your former employees.
Here is a quick look, however, at wide-ranging 2021 rates across the country.
- California – 1.5% - 6.2%
- Illinois – 0.2 % - 6.4 %
- Kentucky – 1.0% - 10%
- Ohio – 0.3% - 9.3%
- New Jersey – 0.4% - 5.4%
The state unemployment taxes paid by your startup are “solely used for the payment of benefits to eligible unemployed workers.”
What happens when someone makes an unemployment claim against your business?
Unemployment benefits, as we know, are funded by FUTA and SUTA taxes paid by the employer. If eligible employees file for and are approved for unemployment benefits, the employer can experience higher SUTA tax rates.
SUTA taxes are generally calculated based on the employer's size, the amount an employer pays in wages, and the number of unemployment benefits collected by former employees. All of these factors contribute to the startup’s “experience rating.” This rating will establish the tax rate for your startup. If a startup lowers the number of successful unemployment claims, then ideally, that company’s SUTA rate will decrease as well.
How much does a small business have to pay in unemployment claims?
When an eligible employee gets an unemployment claim approved, the cost to the employer exceeds the claim itself. Once a claim is approved, a former employee may be able to collect up to 26 weeks of benefits in most states, directly impacting the employer’s premium UI rate. The average cost an employer may pay for an unemployment claim is $4200 but can exceed $10,000.
Each claim can also impact three years of your startup’s UI rates since most state formulas assign you a new rate every three years, based on your size, payroll, and previously successful UI claims. As such, approved unemployment claims can impact your bottom line by spreading the cost of the claim over several years as an increased tax rate.
Rise of fake unemployment claims in COVID-19 pandemic
COVID-19 has launched an explosion of fraudulent claims across the U.S. because of the expansion and increase of available unemployment benefits for qualified workers.
According to CNBC, since the beginning of the pandemic, fraudulent claims, achieved chiefly through identity theft, resulted in more than $36 billion in payments, which eliminated payments to deserving workers while increasing the costs to employers of all sizes.
In response to increased fraud specific to unemployment claims, the U.S. Department of Justice has established the National Unemployment Insurance Fraud Task Force (NUIFTF), involving multiple federal agencies to fight this fraud. These agencies include the U.S. Secret Service, the U.S. Department of Labor, the FBI, and the U.S. Attorney’s Office, to name a few.
According to the Department of Justice, fraudsters are “creating websites mimicking unemployment benefit websites, including state workforce agency (SWA) websites, to unlawfully capture consumers’ personal information.” Further, the Department notes that:
"To lure consumers to these fake websites, fraudsters send spam text messages and emails purporting to be from an SWA and containing a link. The fake websites are designed to trick consumers into thinking they are applying for unemployment benefits and disclosing personally identifiable information and other sensitive data. That information can then be used by fraudsters to commit identity theft."
Additionally, the FBI warned employers last July about the rapid increase in using stolen information to secure unemployment benefits. According to the FBI,
"The criminals obtain the stolen identity using a variety of techniques, including the online purchase of stolen PII, previous data breaches, computer intrusions, cold-calling victims while using impersonation scams, email phishing schemes, physical theft of data from individuals or third parties, and from public websites and social media accounts, among other methods. Criminal actors will use third parties or persuade individuals who are victims of other scams or frauds to transfer fraudulent funds to accounts controlled by criminals.
Many victims of identity theft related to unemployment insurance claims do not know they have been targeted until they try to file a claim for unemployment insurance benefits, receive a notification from the state unemployment insurance agency, receive an IRS Form 1099-G showing the benefits collected from unemployment insurance, or get notified by their employer that a claim has been filed while the victim is still employed."
This fraud is far-reaching and harmful to all involved. According to the Society of Human Resources Management (SHRM), the impact is staggering:
- "Georgia found more than 130,000 false claims filed in July.
- Illinois identified more than 120,000 counts of unemployment insurance fraud in August.
- Maryland announced 47,000 fraudulent claims had been uncovered in early July.
- Pennsylvania reported that 10,000 prison inmates filed for benefits across the state."
Steps startups should take to protect themselves from fraud
In this current environment of extensive fraud, startups and small employers should take proactive steps to protect themselves from illegal unemployment claims. For example, according to SHRM, “it’s important for HR to diligently monitor and confirm the legitimacy of claims.” Failure to stay on top of filed claims could result in a fraudulent claim becoming successful, directly impacting your premium rates.
For example, if you receive an unemployment claim from a current employee, it is more than likely fraud. Your current employee may need to investigate further to see if they have been a victim of identity theft. If such identity theft occurred, then you should tell your employee to report the fraud to the Federal Trade Commission as well as to all three major credit bureaus. Employees can also report the fraud by filing an Identity Theft Affidavit (IRS Form 14039) at irs.gov or www.identitytheft.gov.
If you receive a claim from a former employee, you should contact that employee confirming that they did indeed file a claim. If the former employee did not file the claim, then you should direct them to report the fraud, as described above.
In addition to the affected employee reporting the fraud, the startup should also report it at the employer level. To do so, founders can find resources on reporting the fraudulent unemployment claims on the Department of Labor’s website.
Additionally, startups should have a frank discussion with their employees, letting them know about the surge in false claims. All employees should “exercise caution to protect against identity theft and pay careful attention to correspondence they receive related to unemployment benefits, especially if they have not applied for those benefits.”
Finally, startups and small businesses should review their IT security and policies and procedures. By doing so, you can confirm that your systems have not been compromised while ensuring that all founders and employees are following best practices when it comes to protecting personal identities.
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