Tax Rate Methodology

Chapter 443, Florida Statutes, contains the provisions of the Florida Unemployment Compensation system. The Unemployment Compensation system is self financed and structured as a federal-state partnership. This Unemployment Compensation partnership is designed as the federal government's main program for providing unemployment compensation benefits to the unemployed. Each state maintains legislative autonomy over provisions relating to benefit qualification levels and amounts, benefit duration, disqualification and Unemployment Compensation tax structure within certain federal parameters. For example, federal guidelines require the Unemployment Compensation tax structure be based on benefit experience, have a new employer tax rate of not less than 1.0%, a maximum tax rate of at least 5.4%, and a taxable wage base of not less than $7,000. States maintain their own benefit trust fund account within the U.S. Treasury. A characteristic of this unique partnership is that tax rates, benefit levels, and trust fund balances vary across the states based on that state's particular needs.

The methodology for computing Unemployment Compensation employer tax rates has been an evolutionary process. Early in the program the rate structure was simplistic with little variation in Unemployment Compensation tax rates for employers liable to pay Unemployment Compensation taxes. There have been several law changes that have restructured the tax rate system, the most important of which are highlighted below:

1957 - The rate system was restructured with a benefit ratio calculation using an add on sum of factors (non-charges, excess payments and fund size). The benefit ratio method of rating employers is still the foundation of today's rating methodology.

1963 - Added the variable adjustment factor to the computational process and extended the factors from a one year base to the three year base used today. Also, a schedule to increase the maximum rate from 2.9% to 4.5% by 1966 was enacted. Today the maximum rate is 5.4%.

In the years since, there have been many adjustments that affect the amount of UC taxes that an employer pays, but the method used to assign tax rates has remained essentially the same.

Present Rate Computation Methodology

All new employers first liable to pay Unemployment Compensation taxes are assigned an initial rate of 2.7% for the first 10 quarters of existence. At the end of the initial period, an employer has enough history to qualify for an experienced based tax rate. The present day experienced based tax rate formula uses three major ratios that are combined to add up to the employer's final rate. The factors involved are for individualized costs for each particular employer, for the group costs of those who have individual costs, and for program solvency assurance that is borne by all employers other than those at the initial and maximum rates.

The first factor, called the Individual Benefit Ratio, is the greatest portion of the employer's final tax rate. This ratio is derived by dividing the previous three years of benefit charges for former employees by the taxable payroll for that same three year period. This is computed to five decimal places and rounded to four. What this means to the employer is that there is a relationship between the size of the payroll to the amount of benefits charged. This has a direct bearing on the amount of increase or decrease to that employer's tax rate.

The second factor is the variable adjustment multiplier that is comprised of three ratios that will spread the costs among employers that have had benefit charges in the three previous years. These are the last three years of non charged benefits (those not attributable to any employer), excess payments, (that portion of benefit charges which exceed the maximum rate of 5.4%) and lastly, the fund size factor, which requires that the Trust Fund maintain a balance between 3.7 and 4.7% of one year's taxable payroll. If the Trust Fund has a balance that is within the 3.7 and 4.7% range of taxable payroll, this factor will be zero.

The third factor is the final adjustment ratio that spreads costs not obtained by the second factor to all employers not at the initial or maximum rates. This factor is also distributed amongst employers that have no benefit charges in the preceding three year period. As a result, this ratio determines what the minimum rate for that tax year will be.

The above three ratios added together comprise the employers' tax rates.

The primary reason for employer's contribution rates is that some method of funding is needed to pay unemployment compensation benefits. Ideally, each employer would pay the exact amount of unemployment compensation benefits that are chargeable to his or her account. This is not possible because the maximum contribution rate is 5.4 percent and the employer who would be charged is questionable in certain situations. These problems cause additional costs which must be financed through contribution rates. These additional costs are divided among all rated employers by the adding of the variable adjustment factor and the final adjustment factor. The employer's contribution rate is, in actuality, each employer's benefit cost plus their share of unassigned costs in order to keep the unemployment insurance program solvent.