Breaking Down Washington’s Unemployment Insurance Taxes: Experience-Rated vs. Social Cost

​Breaking Down Washington’s Unemployment Insurance Taxes: Experience-Rated vs. Social Cost

In Washington State, experience-related tax and social cost tax are the two primary components of the Unemployment Insurance (UI) tax system. Both are paid by employers; however, they serve different purposes and are calculated differently.
 
1. Experience-Rated Tax

The Experience-Rated Tax is based on an individual employer's history of layoffs and unemployment claims. Employers with more layoffs in the past are assigned a higher tax rate, whereas those with fewer layoffs pay a lower rate. This system incentivizes employers to minimize layoffs and maintain workforce stability.

How It Works:

• Experience Rating:
  • Washington State uses a "benefit ratio" method to calculate an employer's experience rate.
  • The benefit ratio is determined by dividing the total amount of UI benefits paid to the employer's former employees over a three-year period by the employer's taxable payroll during the same period.
• Assigned Rate:
  • The employer's benefit ratio is compared to other employers in the state and assigned to a "tax class."
  • Washington has multiple tax classes ranging from lower rates for employers with fewer layoffs to higher rates for those with more layoffs.
• Who Pays?
  • Employers only pay this tax. This amount varies according to the employer’s individual experience.
• Collection:
  • This tax is collected quarterly, along with the Social Cost Tax, as part of the total UI tax rate.

 
2. Social Cost Tax

The Social Cost Tax covers the costs of unemployment benefits that cannot be directly attributed to specific employers. These include:

• Benefits paid to workers whose employers went out of business.
• Costs of unemployment claims that exceed an individual employer's contribution.
• Other non-chargeable benefits include those related to state-mandated programs.

How It Works:

• Pooled Cost:
  • The total amount of non-chargeable benefits is calculated statewide each year.
  • The cost is shared among all employers in the state regardless of their individual experience ratings.
• Rate Assignment:
  • All employers pay the same Social Cost Tax rate, although the actual dollar amount paid depends on the taxable payroll of the employer.
  • This rate is determined annually by the Employment Security Department (ESD) and is based on the total social costs of the previous year.
• Who Pays?
  • Employers only pay this tax, as employees do not contribute to UI funding in Washington.
• Collection:
  • The Social Cost Tax is collected along with the Experience-Rated Tax, as part of the total UI tax rate. Both are reported and paid quarterly.

How Rates Are Collected
    1. Total UI Tax Rate:

• The total UI tax rate for an employer is the sum of
  • Their experience-related tax rates.
  • Social Cost Tax rate.
    
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    2.  Collection Process:

• Employers report their taxable payroll to the Washington Employment Security Department (ESD) each quarter.
• Taxes are calculated based on the taxable wages of each employee up to the taxable wage base for the year (e.g., $76,500 in 2024).
• Employers pay the combined total (experience-related tax + social cost tax) as part of their quarterly UI tax payments.

 
Summary

• Experience-Rated Tax: Customized for each employer based on their layoff history; incentivizes workforce stability.
• Social Cost Tax: A shared cost among all employers to cover UI benefits that are not directly attributed to specific businesses.
• Both taxes are essential for funding the UI program, ensuring that benefits are available for workers, while balancing fairness for employers.