Example 5-11

To illustrate the tax saving that may be realized as a result of making voluntary contributions, consider the following case of Krane Company, which is subject to the unemployment compensation law of a state that uses the reserve-ratio formula to determine experience ratings. The following contribution rate schedule applies for 2021:

Reserve Ratio	Rate
0% to less than 1%	6.2%
1% to less than 1.4%	5.6%
1.4% to less than 1.8%	5.0%
1.8% to less than 2.2%	4.4%
2.2% to less than 2.6%	3.8%
2.6% to less than 3.0%	3.2%
3.0% and over	2.6%

For the three 12-month periods ending on June 30, 2020, the company had an average annual taxable payroll of $330,000. This is the base that the state uses as the average payroll. As of June 30, 2020, the credits to the employer's account exceeded the benefits paid by $6,800. Thus, the 2020 reserve ratio is 2.06 percent ($6,800 $330,000), which would result in the assignment of a 4.4 percent tax rate, as shown in the preceding table. If the employer's 2021 total taxable payroll were $390,000, the SUTA contribution would amount to $17,160.

If Krane Company makes a voluntary contribution into the state fund within the time period specified by the state law, the tax for 2021 will be less. For example, if the company contributes $460, the reserve ratio will be 2.2 percent ($7,260 $330,000). As a result, the tax rate will be reduced to 3.8 percent, with the following savings realized in 2021:

Tax payment with no voluntary contribution (4.4% $390,000)			$17,160
Tax payment with voluntary contribution	$460
Reserve ratio (3.8% $390,000)	14,820		15,280
Tax savings			$ 1,880

As of June 30, 2019 (the computation date for the 2020 tax rate), Sanchez Company had a negative balance of $1,050 in its unemployment reserve account in State A. The company's average payroll over the last three 12-month periods amounted to $520,000. The unemployment compensation law of State A provides that the tax rate of an employer who has a negative balance on the computation date shall be 7.2% during the following calendar year.

Using the tax rate schedule presented below, compute the following:

Reserve Ratio	Contribution Rate
0.0% or more, but less than 1.0%	6.7%
1.0% or more, but less than 1.2%	6.4%
1.2% or more, but less than 1.4%	6.1%
1.4% or more, but less than 1.6%	5.8%
1.6% or more, but less than 1.8%	5.5%
1.8% or more, but less than 2.0%	5.2%
2.0% or more, but less than 2.2%	4.9%
2.2% or more, but less than 2.4%	4.6%
2.4% or more, but less than 2.6%	4.3%
2.6% or more, but less than 2.8%	4.0%
2.8% or more, but less than 3.0%	3.7%
3.0% or more, but less than 3.2%	3.4%
3.2% or more	3.1%

a. The smallest voluntary contribution that Sanchez Company should make in order to effect a change in its tax rate. $fill in the blank 1

b. The amount of the tax savings as a result of the voluntary contribution if Sanchez Company's taxable payroll for 2020 is $650,000.