Workers Comp Premiums – Type of Tax
Yes, Workers Comp premiums could be thought of as a tax of sorts. The similarities between taxes and Workers Compensation were spelled out in a previous article. Unemployment insurance (UI), which can be viewed as a tax, is even more similar. Below is North Carolina’s explanation of how UI is calculated.
The rules on UI tax calculation that is similar to Workers Comp has been underlined. The underlined passage will be covered in tomorrow’s post. The complete text on UI insurance calculation is here.
What is Unemployment Insurance Tax?
Unemployment Insurance tax is a tax on employer payrolls paid by employers and used to provide funds from which unemployment benefits are paid to qualified unemployed workers. Unemployment tax is not deducted from employee wages.
Unemployment tax payments made by employers are transferred to the Unemployment Insurance Trust Fund in Washington. Employers receive credit for tax payments which are posted to an experience rating account.
These credits are used to determine the rate schedule from which the tax rates for contributory North Carolina employers are assigned on an annual basis. Each year a prorated share of the interest earned on this trust fund is added back to the experience rating account of each North Carolina employer having a credit balance.
Employers subject to North Carolina unemployment tax pay quarterly tax on a percentage of their payroll. Most newly liable employers will use the standard beginning tax rate as shown below. Employers are notified of their official tax rate by letter if determined liable for unemployment insurance tax.
Experience Rating Accounts
North Carolina Unemployment Insurance tax rates are determined under an experience rating system. An Unemployment Insurance tax account is established for each employer determined liable under the Employment Security Law.
The employer’s account is initially assigned a standard tax rate prescribed by law. After approximately two years, an employer’s tax rate is determined annually based on experience. Experience rating is affected by payroll, tax paid, timeliness of payments and UI benefits charged against the employer’s account. Based on economic conditions, an employer’s tax rate could be as low as .00% and as high as 6.84%.
In November of each year, active employers will be mailed Form NCUI 104, Unemployment Tax Rate Assignment, showing the calculation of the tax rate for the succeeding calendar year. Experience rating accounts are maintained for rating purposes only. This statement requires no payment, nor can it be used to pay tax due. The tax rate shown on the Form NCUI 104 becomes final unless protested in writing prior to May 1 of the following year.
NOTE: No employer’s contribution rate shall be reduced below the standard rate for any calendar year until its account has been subject to being charged with benefits for at least 12 calendar months ending July 31 immediately preceding the computation date (August 1) or its liability extends over a period of all or part of two consecutive calendar years.
The system allows an employer to make a voluntary contribution to reduce the tax rate. Voluntary contributions must be made within 30 days following the date Form NCUI 104 was mailed. A check for the voluntary contribution must be made payable to the Division of Employment Security and mailed to:
- Division of Employment Security
- PO BOX 26504
- RALEIGH, NC 27611-6504
How are tax rates calculated?
Each employer’s tax rate is assigned based on the rate schedule in force and his/her own experience. Experience includes length of liability, tax payments, taxable payroll, timeliness of payments, and benefit payments charged. Form NCUI 104 is a summary of these factors. Use the DES site, www.ncesc.com, Business Quick Links, to view your tax rate and benefit charge information and to calculate a voluntary contribution.
Each employer’s payroll for the last 3 fiscal years as of July 31 of the current year is divided into the applicable credit or debit balance to yield a ratio. This ratio is applied to the applicable rate schedule and determines the tax rate.
Can the tax rate be protested?
Written protests must be postmarked between the statement mailed date and May 1st of the year to which the tax rate applies. Valid protest must be signed by an owner, partner, or corporate officer. An example of a valid protest is one in which an error has been found in the figures used for calculation of tax rates.
Maintaining Adequate Records
All employers must maintain records for each person they employ (including corporate officers). These records must show:
- The employee’s name and social security number.
- The beginning and ending dates worked.
- The amount of wages paid.
- All other payments made to the employee including vacation pay, tips and the reasonable value of board and lodging or other remuneration for services.
Records must be maintained for at least five years and be available for inspection by authorized personnel of the Division of Employment Security.
- A general business employer with at least one worker in 20 different calendar weeks during a calendar year, or with a payroll of at least $1,500 in any calendar quarter;
- An employer who acquires substantially all or any portion of a liable business in North Carolina;
- If approved by the Division, an employer voluntarily choosing coverage not required by law;
- An employer subject to FUTA;
- A 501(c)(3) non-profit organization with at least four workers in 20 different calendar weeks during a calendar year;
- An employer with agricultural labor of 10 or more workers on any day during 20 different weeks in a calendar year, or with $20,000 or more in gross payroll for any calendar quarter;
- An employer with domestic employment in a private home, college club, fraternity or sorority with a payroll of at least $1,000 in any calendar quarter;
- A state or local government agency or department;
- An employee leasing company or temporary help company that, under contract, supplies individuals to perform services for clients or customers.
- Any Indian Tribe as defined in the Federal Unemployment Tax Act, 26 U.S.C. § 3301 et seq.
One can see from the above UI Tax calculation that workers comp premiums are calculated similarly. An employer’s Experience Mod is calculated similarly which has a huge effect on workers comp premiums.
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