Unemployment Taxes, Fraudulent Claims and Identity Theft
Donny Phillips, Heather Vogus
As we approach unemployment tax season, the uncertainties around COVID-19 will only increase. How will the pandemic impact 2021 unemployment taxes? What about the years that follow? And in addressing unemployment, how can employers avoid fraud and identity theft within their organizations?
For an employer operating in a pandemic environment, everything may feel out of control. But managing unemployment tax is one thing that's still in your hands. The majority of 2021 tax rates will be assigned based on a calculation period ending June 30, 2020. This means that they only reflect a few months where employers were dealing with COVID-19 implications; the true impact of COVID-19 from an unemployment tax perspective likely won't be uncovered until much later. Currently, in most states, employers pay taxes under a merit-rated system based on the benefits paid out against their account and the taxes paid into their account. Each state sets its own taxable wage base to which the tax rate is applied. For example, in Ohio (where the two of us are based), a for-profit employer's assigned tax rate is paid based on the first $9,000 each employee earns each year. Based on this formula, it's anticipated that 2022 will be the year that rates increase significantly due to COVID-19.
And taking the right steps now can make a sizable impact on those 2022 rates.
While some states may take legislative action to adjust the rate tables, these updates don't often happen quickly. To use Ohio as an example again, the state adjusts its tax rate each year and releases details approximately eight months before the rate goes into effect. This means we likely will not see the 2022 tax rate table until October or November of 2021. So it's important to be wise with your resources and funds and prepare ahead for a different budget.
We may not know for sure what rates to expect in the coming years, but we can use rate forecasting to estimate calculations and prepare tax impact analysis. This can include the estimated effect on unemployment tax liability due to anticipated layoffs or location closings, one or more non-contested claims and anticipated increases in taxable payroll.
Some states offer programs that can result in unemployment tax savings. Some states allow employers to make a voluntary contribution to their account, which can lower their tax rate. In addition, a handful of states allow entities with common ownership to pool their tax rates through common or joint rating, which may result in a net tax savings. Ohio offers both options and elections must be made by then end of the calendar year for the following July 1 tax year.
In analyzing the unemployment tax rate challenges, we can't ignore the rise in unemployment-related fraud and identity theft. How can you minimize the risk to your workplaces and your employees?
A combination of increased claim volumes, the additional benefits granted through the CARES Act and states allowing claims to be backdated has contributed to the uptick in fraudulent claims and identity theft. And while you may not be able to prevent a fraudulent unemployment claim, according to the Ohio Department of Job and Family Services, “better detection and prevention of improper unemployment insurance payments results in a decrease in benefit payments, which leads to decreases in employer taxes.” If an employer receives a claim from an employee, there could be a direct cost for the benefits that are paid out fraudulently. Meaning that employers may have to compensate the state for paying certain benefits, and the taxes on those benefits can be significant.
Unemployment fraud is detected several ways, including computer cross-matching to compare quarterly wages with payments made to claimants as well as government records, new hire reports and anonymous tips. Unlike other forms of identity theft, unemployment fraud can't be prevented by the usual measures like placing a freeze or watch on your credit report. It is up to states, employees and employers to stop benefits from being issued once a claim has been determined as fraudulent. If you receive an unemployment claim for someone that is still employed by your organization, verify with the individual whether or not they filed it. For instance, an employee may have filed a claim due to loss of a second job or due to a reduction in hours, which would be appropriate. However, if they did not file an unemployment claim, take the following actions:
Notify your claims examiner about the fraudulent claim so that they may respond to the claim appropriately.
Suggest that the individual file a police report, place a fraud alert on their credit report and notify the state unemployment agency's fraud unit. Most states have either a fraud hotline or webpage that can be used to report fraudulent unemployment activities.
Once a fraudulent claim has been filed, the best line of defense is to respond to the unemployment claim in a timely manner.
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