What is a voluntary contribution?
Simply stated, a voluntary contribution is a way of “buying down” your tax rate in order to produce a savings over the course of a year. By making a voluntary contribution payment, an employer will reduce their tax rate by a single bracket or sometimes two depending on the tax rating system in a certain State. Once this voluntary payment is made, the sum of the following tax payments at the new rate plus the amount of the voluntary contribution should be less than the sum of tax payments at the original tax rate – resulting in a net savings over the course of a year.
Voluntary contributions can only be made by contributory employers. A contributory employer pays quarterly unemployment insurance tax at an assigned rate based on experience. A reimbursable employer repays the state agency dollar for dollar for all benefits paid to former employees. There are pros and cons to each, however reimbursable employers do not have the benefit of making voluntary contributions.
Each state may have different deadlines to make a voluntary contributions, so make sure you stay within the time limits of your state. Many states allow for a deadline of 30 days after the mailing date of the unemployment tax rate notice.
How do you know if it’s beneficial to make a voluntary contribution?
Deciding whether to make a voluntary contribution can be confusing. Here are some easy steps:
- The first step is to understand how your state’s tax system works and how your tax rate is calculated. New Jersey simply divides the reserve account balance by average taxable wages to produce the reserve ratio. The reserve ratio is then translated into a tax bracket based on the current year’s tax table. The state of New York calculates the rate the same way, however adds an additional rate called a subsidiary rate, which is derived from a separate tax table. It’s important to keep track of each moving part of your tax rate as a voluntary contribution can affect more than one part of the rate, as seen in the case of New York.
- Once you understand the method your state uses to calculate the tax rate you will need to determine how much money to add to your reserve account in order to get to your desired reserve ratio. This sum of money is called the “voluntary contribution”. Remember: reserve ratio = reserve account balance / average taxable wages.
- After you determine the amount needed to achieve the desired reserve ratio, the next step is to multiply your average taxable wages by the desired tax rate. This will give you the projected amount that you will pay in UI taxes throughout the next year.
- Add the value of the voluntary contribution you found in step to the total projected UI taxes found in step three.
- Subtract the value found in step four from the total amount of UI taxes that will be paid at the original UI tax rate. If this is a positive number then it is beneficial to make a voluntary contribution. If this is a negative number, it will not be beneficial to make a voluntary contribution.
Can everyone make a voluntary contribution?
The answer is no. As mentioned before, you must be a contributory employer to make a voluntary contribution. Most government entities and nonprofit organizations are not contributory employers and cannot make voluntary contributions.
Only about half of the states in the U.S. allow employers to make voluntary contributions. Refer to the chart below to see if a voluntary contribution is allowed in your state:
|District of Columbia||No|
To see whether it would be advantageous to make a voluntary contribution for your organization, contact us today! One of our experts will be more than happy to assist you.