While most people take unemployment benefits for granted, the process by which they are implemented and secured is quite complicated. In Texas, the Texas Workforce Commission is in charge of collecting unemployment taxes, guarding the unemployment fund, and making payments to eligible individuals.
Generally speaking, any wage paid by a Texas employer to a Texas employee is taxed at a flat rate in order to fund the state’s unemployment fund, from which unemployment benefits are paid to residents who are laid off or who otherwise qualify for unemployment payments. This tax is usually withheld from an employee’s paycheck every two weeks. While the rate at which wages are taxed for this purpose can vary, it generally hovers around 3%.
A new law in Texas affects how employers and employees in certain industries are taxed. The law – Texas House Bill 3150 – exempts certain employers from paying unemployment tax. Texas House Bill 3150 specifically exempts so-called professional employer organizations (PEOs) from paying unemployment taxes. Under the PEO model, a company outsources many of the functions associated with employee management to another firm, called a PEO. These services usually include hiring, training, payroll, and other human resources functions. PEOs currently operate in all 50 states, and approximately 2.5 million employees in the United States are associated with a PEO.
Under the PEO model, an individual is technically an employee of the PEO, not the “parent” company. For example, suppose Company A operates in the technology sector and needs to increase the size of its workforce but wants doesn’t want to take the time to recruit, hire, and train new employees itself. Company A might hire PEO firm B to provide these services on its behalf. Firm B would then find employees who are qualified and capable of doing the work that company A needs. Firm B would hire, train, and pay these new individuals, who would technically be employees of PEO firm B despite the fact that the actual work they perform is done for company A. Company A transfers a monthly fee to firm B, who uses that fee to pay its employees and to provide other services.
Critics of the current tax structure argue that it unfairly “double taxes” these arrangements. Previously, both the financial relationship between company A and PEO firm B and the relationship between firm B and its employees qualified as separate employment arrangements (i.e. company A employs firm B, who then employs individuals) and were therefore both assessed an unemployment tax. These critics argued that this set up was unfair, as PEO relationship are in effect just a parent company employing individuals directly through the use of a middleman.
Texas House Bill 3150 eliminates this double taxation by exempting PEO-individual employee relationships from the unemployment tax. Eliminating the unemployment tax on PEOs, however, is estimated to cost the state unemployment fund upwards of $15 million per year; therefore, the bill also includes an increase of 0.01 percent in the unemployment tax for non-PEO employment relationships. This increase will amount to approximately $1 per employee per year.
Supporters of the bill have lauded it for creating a fairer taxation structure that doesn’t force PEOs to pass on unnecessary costs to companies seeking to higher new employees, while critics have claimed that PEOs used influence and lobbying power to secure a sweetheart deal. Nonetheless, the bill goes into effect on September 1, 2015.