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SUI Unemployment Experience Rating

Experience rating is the method by which employer contribution payments under the state unemployment compensation laws may be varied on the basis of each individual employer's experience with unemployment. Experience rating is based on the proposition that the cost of unemployment compensation should be paid in such a way that those employers whose workers suffer the most involuntary unemployment should pay at a higher rate than those employers whose workers suffer little involuntary unemployment.

As a result of experience rating, employers may be liable for the lowest rate under the law (usually ranging form 0.0% to 0.5%) to rates that exceed 5.4% in some states for employers with high involuntary unemployment. (With the increase in the total federal credit to 5.4% in 1985, the states were required to provide for experience rating up to at least 5.4% beginning at that time. Many states now have maximum rates well in excess of 5.4%.)

Experience rating is provided under all state unemployment compensation statutes. Four distinct formulas devised to establish the relative experience of individual employers with unemployment costs are currently in use by states:

Benefit ratio formula

An employer's unemployment insurance contribution rate is the same as the ratio of benefits to payrolls over the last three years. The rate may be adjusted based upon the overall balance in the state unemployment insurance fund.

Benefit wage ratio formula

An employer's experience factor is his benefit wages (proportion of payroll paid to those workers who become unemployed and receive benefits) divided by his total taxable wages. The state's experience factor is the percentage relationship between total benefit payments and total benefit wages in the state during a three-year period. The employer's experience factor is multiplied by the state experience factor and an unemployment insurance contribution rate is assigned according to a schedule of rates for specified ranges of ratios.

Payroll decline ratio formula

An employer's experience with unemployment is measured by the decline in his payrolls from year to year or from quarter to quarter. Declines are expressed as a percentage of payrolls. Unemployment insurance contribution rates are assigned based upon a particular employer's experience as compared to others and upon the estimated amount needed to fund the total state reserve.

Reserve ratio formula

An employer's reserve ratio is the balance in his state unemployment insurance account (total contributions less total benefits paid) divided by his payroll. The account balance is usually cumulative from the date the employer became subject to the state law; payroll is usually a three-year average annual taxable payroll. Unemployment insurance contribution rates are then assigned according to a schedule of rates for specified ranges of reserve ratios. A higher reserve ratio generally indicates a lower contribution rate. In most states using this formula, the schedule of contribution rates varies depending upon the total balance in the state's fund. Employers may therefore benefit from or be penalized by general conditions within the state. is a free online resource featuring a compilation of research, collaboration and web tools for use by payroll professionals and more including information about payroll tax articles, federal tax information and state tax information.

Helpful Hint... Anytime you move or have a major life change (for example - marriage, divorce, birth of a child, etc.) always be sure to complete a new W-4!