As though the past year hasn’t been hard enough on small businesses, there may be more challenges around the corner for already cash-strapped business owners. The unprecedented unemployment rate caused by the COVID-19 pandemic has been a serious drain on the coffers of state unemployment insurance programs. As a result, some experts are predicting that tax increases could be in the works for small business owners.
To best understand what’s going on, let’s take a broader look at what the unemployment insurance program does, how it works and how small businesses might be able to cope moving forward.
The purpose of unemployment insurance
The unemployment insurance program in the United States was created in 1935 as part of President Franklin D. Roosevelt’s “New Deal” legislative package to deal with the Great Depression. The system has 2 objectives.
The first objective is a humanitarian one as it provides a financial safety net for workers who lose their jobs through no fault of their own.
The second objective is economic—keeping unemployed workers afloat financially so that they can continue to patronize the businesses that they and their families depend on.
How unemployment insurance works
Under this program, an employee who is laid off is typically eligible to collect benefits for 26 weeks. When times are tough, Congress and the White House routinely extend this period (such as what happened during the pandemic). The total usually amounts to about half of a worker’s regular paycheck.
The federal government oversees the administration of the program through the Department of Labor, but each state runs its own program and has its own rules regarding eligibility and benefit levels.
The funding mostly takes place at the state level. The standard unemployment tax rate for small businesses is 6 percent, although there are variations by state.
Costs of an unemployment claim
The average unemployment claim ends up costing about $4,200 in total. Every business is different, as not all businesses lay off the same amount of people. Therefore, the state sets up each business with its own unemployment insurance account. When more has to be paid out, the state has the authority to review the tax rate of an individual business and make changes to replenish the funds.
Most states use a 3-year cycle to evaluate funding levels, so a business has the opportunity to rebound from 1 abnormally bad year—something that’s particularly relevant during these uncertain times.
But don’t underestimate even the cost of a single claim.
One person making an average draw on the system can affect a business’s taxes by anywhere from $4,000 to $7,000.
What a small business owner can do
As far as the pandemic and economic lockdowns, all small business owners were pretty much stuck in the same boat with little they could do to affect the outcome. But moving forward, there are steps small businesses can take to help themselves.
For example, spouses, parents and teenage children are exempt from the unemployment insurance tax. So if you and your spouse have dreamed of working together one day, maybe now’s a time to look at taking the leap. If your retired parent wants something to do a few days a week, take them up on the offer. And if you’ve been thinking that your high school child needs to get some practical work experience, again, now may be the time.
For the rest of your staff, lowering unemployment costs is simply about getting back to the basics of smart hiring and sound human resources management.
If possible, be less regimented in what your basic requirements are for job applicants. This opens up your applicant pool to candidates with more diverse skills, something that can be invaluable when you’re in a pinch and have to make unexpected changes. Another common cost employers face is having to lay off in 1 department while hiring in another. Versatile employees can simply switch roles.
If a hire doesn’t seem to be working out, be sure that you’re not only giving the employee every chance to succeed, but that you are also documenting those efforts. If you end up in an unfortunate position where you have to fire someone, you can at least be firing them “with cause.” Depending on your state, that can protect you from having to pay unemployment benefits.
If an employee was terminated for cause, you may be in the uncomfortable position of having to contest their claim with the state. This is something that you as the business owner have every right to do.
Most employers don’t want to, since the contesting process can be time-consuming and it’s confrontational. Most small business owners aren’t hard-hearted, and they want to see the terminated employee land on their feet.
One possible way around having to contest an unemployment claim is to offer the fired employee a severance package in exchange for an agreement not to file for unemployment. It’s better for you to pay the employee directly than having the state do it, and you might find severance less costly than the time and hassle of contesting unemployment.
Small business owners know how to think creatively. Now, with the potential rise of unemployment insurance taxes, they are going to have to do it one more time.