How well do you know your PEO? It’s an important question for a lot of reasons, including SUTA dumping, a too-common form of tax fraud that can do a lot of damage to the companies using a PEO.
The Indiana Department of Workforce Development is aggressively pursuing companies that have engaged in SUTA dumping. It is much less widely understood than blatant forms of tax evasion, avoidance or fraud, but SUTA dumping is no less harmful or criminal, and it has become somewhat rampant—especially in the PEO industry. If you have considered strategies to lower your company’s State Unemployment Tax rate or are in a co-employment relationship with a PEO, read on.
What is SUTA dumping?
SUTA is an acronym for the State Unemployment Tax Act. SUTA dumping is a form of tax avoidance through “dumping” or exchanging a relatively high unemployment tax rate for a lower one by setting up a shell company, shifting employees, or other fraudulent schemes.
In Indiana, a new company is subject to an unemployment tax rate of 2.5% of the first $9,500 in wages for each employee. As a company matures and gains “unemployment experience,” the Department of Workforce Development either adjusts the rate up or down. Like any insurance premium, more claims mean a higher rate.
Until 2010 that tax was assessed on the first $7,000 in wages with a maximum rate of 5.6%, but for obvious reasons, Indiana’s pool of unemployment insurance money has run dry forcing the state to manipulate rates.
For 2012, the tax is assessed on the first $9,500 in wages with a maximum rate of 10.072%. A company with good experience may push its rate down under 2% while a company with bad experience and unemployment claims stretching out to nearly two years will inevitably feel the pain of a max rate—a whole lot of pain for companies with numerous employees.
SUTA dumping can come in many forms; let me give you an example: Example Company (or EC) has 200 employees after having to lay off 100 during the recession. Before that, EC employed 300 and had a SUTA rate of 1.9%. EC’s total SUTA exposure was 300 x $7,000 x 1.9% = $39,900 per year. Following three solid years of layoffs and continuing unemployment insurance claims, EC’s business has begun to stabilize, and the company has even begun to add heads again, but the Department of Workforce Development has sent notice raising EC’s SUTA rate to 10%. With only 200 employees and the new $9,500 wage limits, EC pays 200 x $9,500 x 10% = $190,000 per year. There goes the ability to add heads.
PEOs and SUTA dumping
Within the PEO model, there’s a relationship of co-employment and a much higher motivation to manipulate SUTA rates. A PEO engages in the business of providing human resource support and sometimes reduced cost of employee benefits and workers’ compensation through pooling of employees and elements of self-insurance. While the initial cost savings may lure employers into the fold, there are often untold future implications of becoming a member of a large pool. Because the PEO becomes the employer of record, employment-related tax filings, including State Unemployment Insurance payments are filed on the PEO’s tax account.
All employers within the pool are subject to the PEO’s SUTA rate, which is calculated as the aggregate of all the participating employers’ experience.
What if a PEO with 300 client companies, many of which were engaged in blue-collar industries, went into the recession with a SUTA rate of 2%? As many of those client companies laid off large percentages of their workforces or even shut their doors, that PEO probably hit the max rate.
What if you were owned one of those companies, had 100 employees, and did not terminate any of your workforce? Would you concede to a 10.1% SUTA rate? I doubt it, and so do key personnel and management within the PEO industry.
And if the owner of that PEO—faced with a shrinking book and the possibility of losing remaining and best clients due to max SUTA rates—decides not to face the music but to find a way to “dump”? To open a shell company and dump clients into it? To purchase an existing business simply to obtain access to an existing account with lower SUTA rates to retain revenue?
If a PEO owner “dumps,” he or she subjects the entire pool of remaining clients to that decision—and to the liabilities and penalties from getting caught. According the Indiana Department of Workforce Development, all client companies of a PEO are jointly severally liable for this decision.
So let me ask again: How well do you know your PEO?