Protect Your TWC Tax Rate from Unemployment Chargebacks

Understanding TWC tax rate chargebacks is essential for Texas employers to manage unemployment costs. This guide explains how to contest chargebacks and lower your tax rate effectively.

How to Protect Your TWC Tax Rate from Chargebacks

Author: Jacob M. Monty

Despite the current labor shortage, some employers may be suffering the lingering effects of increased unemployment claims from prior years. Texas Workforce Commission (TWC) unemployment chargebacks can affect an employer’s tax rate for years to come. Here’s how to contest them.

Chargeback basics
Employers pay state unemployment insurance taxes to the TWC as contributions to unemployment benefits. Taxed employers pay the taxes quarterly. When an employee’s job is terminated, they can apply for unemployment benefits. When unemployment benefits are paid, the amount of the unemployment claim is charged back to the claimant’s previous employers for purposes of determining how much unemployment taxes the employer should pay in the future.

Just as car accidents drive up car insurance rates, the more unemployment claims charged back to an employer, the more unemployment tax the employer owes moving forward. Although unemployment tax rates change year to year due to a variety of factors, the average employer has a tax rate between 1.25% and 1.5%.

Unemployment benefits are charged back to base-period employers. The base period consists of a one-year period a year and a half before the claim was filed. If there are multiple base-period employers, the amount of each employer’s chargeback is based on the base-period wages it paid during the period. The calculations can get confusing when an employee has multiple jobs during a year. There’s a risk the employee’s wages will be mistakenly charged back to the wrong employer’s account, erroneously driving up their tax rate. For that reason, it’s important for you to review chargeback claims when they’re filed.

Lowering your tax rate
Employers can attempt to lower their tax rate in two ways: voluntary contributions and contesting chargebacks. Voluntary contributions are paid by employers when they experienced a lot of chargebacks in a specific period, but they want to reduce their overall tax rate. Employers may voluntarily pay all or part of the benefits paid to former employees rather than repaying the benefits through an increase in their employment tax rate.

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Employers that want to make voluntary contributions can visit the TWC employer portal to calculate what effect it would have on their overall tax rate.

Contesting chargebacks
The best way to manage your overall tax rate is to timely contest chargebacks to your account. When an applicable unemployment claim is filed, base period employers will receive a notice of maximum potential chargeback. You should be sure to review the notice carefully to confirm the previous employee’s alleged dates worked, reason for separation, and wage information are accurate.

In some cases, the reason for separation may protect you from a rise in your tax rate based on the chargeback. For example, if the employee was terminated for misconduct or left voluntarily without good cause (or if one of the protected categories applies or if the date or wage information is listed incorrectly), you should contest the chargeback by responding to the notice of maximum potential chargeback within 30 calendar days.

You should keep personnel folders for each employee with clear records of whether separations invoke protection from chargeback or other legal concerns. The personnel folders should include write-ups signed by the employee for misconduct, records of last chance warnings, and witness statements regarding instances of misconduct when the employee refuses to acknowledge it. Your record keeping practices can help you prove the facts surrounding a termination or employee departure.

For more information on protected categories or how to respond to a notice of maximum potential chargebacks, you can reach out to the TWC or local counsel.

Jacob M. Monty is the managing partner at Monty & Ramirez LLP in Houston and can be reached at 281-559-6448 or jm****@*************aw.com.

This article was originally written by Jacob M. Monty for the Texas Employment Law Letter.