How is the unemployment tax rate computed?
Generally, in the first two years of a business's liability, the tax rate is set by law at 2.7%, except for employers in the construction industry, whose rate in the first two years is that of the average employer in the construction industry, which is announced by UIA early each year. In recent years, this construction rate has ranged from 6.8% to 8.1%.
The rates in the third and fourth years of liability are partly based on the employer's own history of benefit charges and taxable payroll. This history is known as an employer's unemployment insurance experience (this will be more fully explained later).
Beginning in the fifth year of liability, the tax rate is made up of three components which are computed separately and then added together to figure the yearly tax rate.
The three components are the Chargeable Benefits Component (CBC); the Account Building Component (ABC); and the Nonchargeable Benefits Component (NBC).
The Chargeable Benefits Component and the Account Building Component are affected by the employer's payroll, and the unemployment benefit charges to their account. Since these components reflect each company's experience, they are known as the experience components, and the entire taxing computation is known as experience rating. Generally, employers that have many former workers drawing unemployment benefits have higher tax rates, while employers that have few former workers drawing benefits have lower tax rates.
Michigan's unemployment tax system is one of the most highly "experience rated" systems in the country. This generally means that a Michigan employer's tax is more closely based on the actual benefit charges to its account, and the size of payroll, than employers in most other states.