The enactment of the state’s fiscal year 2017 budget brought good news to you and the more than 33,000 other employers whose taxes fund the Unemployment Insurance (UI) program. Taking another step to improve the business climate in Rhode Island, the General Assembly enacted two key policy changes to the UI tax structure proposed by Governor Raimondo.
Their combined effect cut UI taxes for RI businesses, while improving the overall fairness of the system for two consecutive years. In 2017, these changes saved employers approximately $30 million in unemployment taxes. In 2018, these changes will save employers an additional $10 million in unemployment taxes for a total of $40 million.
A big factor in determining an employer’s UI tax payments is their “experience rating.” This means how often the business lays off workers who then claim UI benefits. A lower experience rating means the employer lays off fewer workers, and results in a lower UI tax rate being applied to the employer’s taxable wage base.
When determining your experience rating — and resulting UI tax rate — the state refers to one of nine UI tax schedules, lettered A through I, which are pegged to the “reserve ratio” of the UI trust fund. The reserve ratio compares the cash balance in the fund to the total wages paid that year. It’s meant to provide a picture of the overall solvency of the fund and its ability to pay out benefits in a time of high unemployment. The relationship between the UI tax schedule determination and the reserve ratio is counter-cyclical — meaning that when reserves are high, UI taxes are low; and likewise, when reserves are low, UI taxes are high. Due to a persistently low reserve ratio, Rhode Island has used the highest tax schedule, Schedule I, since 1992.
Governor Raimondo’s first policy change accelerates a move to the next lower tax rate schedule, Schedule H, by revising downward the reserve ratio required by law. This will allow Rhode Island to drop out of the maximum-rate Schedule I and result in a tax cut for every experience-rated employer in the state.
The second change creates three new, lower tax rate brackets at the bottom end of each rate schedule, thus reducing tax rates in each of the nine schedules for those employers that are least likely to lay off workers who will draw down benefits from the UI system. This reinforces the overall fairness of the UI tax structure, ensuring that companies with the lowest experience ratings pay the lowest tax — and that there’s a powerful incentive in place to avoid layoffs.
In December, the Department of Labor and Training notified employers of their tax rate for 2017. The changes to the taxable wage base went into effect on Monday, January 1, 2017, and will be reflected in employers’ first quarter tax bill, which is due April 30, 2017.
If you have questions about these tax changes, please call the Division of Taxation’s Employer Tax Section at 401-574-8767.
Voluntary Contributions - Beginning in 2016, Rhode Island began offering employers the opportunity to reduce their Unemployment Insurance tax by making a voluntary contribution to their Unemployment Insurance account. The contribution will be applied as an additional credit for the qualifying year potentially increasing the accounts reserve percentage and decreasing the experience rate for the calendar year.
Questions regarding a company’s eligibility can be directed to Employer Tax at (401) 574-8767.
Questions on tax changes should be directed to Phil D’Ambra, Chief of UI Employer Tax - (401) 574-8785
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