Dec 17th 2009
Employers should anticipate increases in their unemployment taxes in 2010 and possibly beyond, whether or not their business is in a state like Virginia, where increases are automatic if the unemployment trust fund falls below a certain level, or in states like Michigan and Texas that have complex formulas based on "experience rates," or states that decide to levy some form of deficit surtax. State unemployment trust funds have fallen to such a low level that rate increases may be required to rebuild their balances even when employment improves. States that have borrowed money from the federal government under the Federal Unemployment Trust Act (FUTA) to cover their current obligations will need to pay this money back with interest.
According to the Journal of State Taxation, at least 12 states, including Michigan, Texas, and Virginia, with depleted trust fund balances had borrowed from the federal government under FUTA provisions of by the end of the summer, and others are expected to follow suit. States that accepted interest-free loans offered under ARRA (the Stimulus Act) will need to pay interest on these loans after two years.
Rate increases in states like Washington may seem small -- the average tax rate in 2010 will be 2.38 percent, up from 1.55 percent in 2009 -- but they are based on a much higher percentage of an employee's wages. Texas, where the minimum rate will nearly triple for 2010, taxes the first $9,000 in earnings while Washington taxes the first $36,000.
The Texas minimum tax, which is paid by nearly 255,000 employers, or 67 percent of those who have been in business for at least a year, according to the Texas Workforce Commission, will triple. It will be $65 per worker, up from $23 this year. The maximum rate is based on an experience formula, and is generally paid by companies if more of their employees who were laid off received benefits. The maximum rate in Texas will increase from 6.26 percent to 8.6 percent, from $563.40 per employee to $774.
Across the board, unemployment taxes in Texas will roughly double next year, the Commission says. But the $65 per worker minimum tax bill in Texas compares favorably with $81 in Illinois, $100 in Florida and $120 in Arkansas. Commission Chairman Tom Pauken said next year's average rates in Texas are only slightly higher than those charged in 2004 and 2005, the Dallas Morning News reports.
The state already has borrowed about $1 billion from the federal government to help keep the fund afloat. Texas declined loans from the Stimulus Act because accepting the money would have required changes to the state's eligibility rules.
The Nevada Employment Security Council has decided not to increase employment taxes this year because it would be a hardship for employers suffering through a recession. Instead, Nevada Employment Security Division Administrator Cindy Jones said her agency, which has already has borrowed $60 million from the federal government to keep paying benefits this year, will continue to borrow more, likely close to $1 billion, in 2010, the Las Vegas Review-Journal reports.
But employers in Nevada and other states that choose this option and then cannot repay their loans in the next two or three years will lose 0.3 percent of the 5.4 percent federal unemployment tax credit for every year that the loan goes unpaid. So businesses in states that can't repay the loans will end up paying more tax whether or not their rates are raised.
The FUTA tax is a flat tax on the first $7,000 of an employee's wages (6 percent plus a temporary surtax rate of 0.2 percent in 2009), but employers who file timely are eligible for a 5.4 percent credit against the gross FUTA tax to reflect state unemployment taxes, leaving a liability to the federal government of 0.8 percent. FUTA revenue supports the fund from which states borrow, among other things.
Michigan had to impose a "solvency tax" of $67.50 on 20 percent of the state's companies in order to repay federal loans in 2009, HubPages reports. The state borrowed about $1 billion in interest-free loans from the federal government under the Stimulus Act, but Michigan is not expected to be able to repay the loans in the two-year interest-free period says Lori Roberts writing for the Journal of State Taxation.
The unemployment tax system in Michigan is one of the most highly "experience rated" systems in the country. The experience rated system was originally designed to keep trust funds solvent, Roberts says. Unemployment rates are applied over a period of five years. Generally, in the first two years of a business's liability, the tax rate in Michigan is set by law at 2.7percent. 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.
Under this system, employers that have many former workers with payroll deductions drawing unemployment benefits have higher tax rates, while employers that have few former workers drawing benefits have lower tax rates, a system that would seem to favor newer, small companies over larger, more established companies. Texas, Connecticut and many other states have similar, but less complex systems.
In Virginia the state unemployment tax that businesses pay on each employee will be going up, from an average of $95 per employee per year to an average of $171 a year in 2010, $234 in 2011 and $263 in 2012, based on an additional levy of .2 percent to be included in the final tax rate assignment, the Fredricksburg Free-Lance Star reports. This charge is added whenever the solvency level of the trust fund from which unemployment benefits are paid falls below 50 percent as mandated by the Virginia Unemployment Compensation Act.
A pool cost charge of 0.28 percent has also been included in the final rate assignment. The pool cost is defined in the Virginia Unemployment Compensation Act as a charge added to compensate for unemployment benefits paid that cannot be assigned to any specific employer.
In good times Virginia businesses have not had to pay any unemployment tax.