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BUSINESS PAYROLL TAX INCREASE-UNEMPLOYMENT TAX
Mahopac, NY January 1, 2014: Owners of businesses and company payroll and benefits personnel understand that one significant cost of employment is state and federal unemployment cost, although up until recently federal unemployment costs were not really an issue. For federal unemployment purposes the maximum amount of annual payroll that was subject to tax was $7,000. The statutory rate was 6%, except that from the 1970s to June 30, 2011 there was a .2% surcharge making the rate 6.2%. If the employer paid unemployment tax to their state fund, a credit was available against the FUI rate of up to 5.4%. Thus for many states, calculating the FUI liability was simply multiplying $7,000 per employee by .008 and the annual cost of FUI for each employee was $56.
There has always been a maximum liability amount that you could defer until the time when you filed Form 940 at the end of the year. Back in the '70s it was $200 and later raised to $500. That meant that if the liability reached the maximum deferment amount a FUI tax deposit was required in order to avoid a late deposit penalty. With the advent of electronic funds deposit any amount up to $500 could be paid with a check at year end; however if the balance exceeded $500 as a result of the forth quarter payroll, the liability is required to be deposited using the Federal Electronic Tax Payment System ("FETPS" whereby the payment could either be made on line or by telephone. Thus to avoid late deposit penalties, if the liability exceeded $500 within the first three calendar quarters, a quarterly deposit was required.
To simplify this let's assume that at the end of the first calendar quarter that the FUI liability was $510. A deposit using the FETPS is required immediately after the end of the first calendar quarter. This continues throughout the year so that at the end of the year the balance due with the Form 940 is less than $500. The penalty for late deposit of FUI ranges between 2 and 25 percent. As most companies with no change in employee status during the year max out their FUI liability during the first quarter, payments that are required to be deposited immediately after March 31 but left unpaid until the Form 940 is filed will be subject to a 25% penalty. So if you owe $1,200 the penalty would be $400.
FUI Surcharge Removed But Credit Reduction Charge Added Back
In 2011, effective July 1, the .2% FUI surcharge was removed lowering the rate from 6.2 to 6 percent. Thus for many the net rate after state credits was .6% down from .8%. However as a result of the severe recession experienced by the United States resulting in higher than normal unemployment changes were made to the benefits periods for the unemployed resulting in more states being required to borrow from the federal unemployment fund in order to meet the unemployment benefit payments and if this loan is not timely repaid it has the affect of increasing the amount of FUI that must be paid by the employer. If a state has an outstanding balance on January 1 for two consecutive years and does not repay the full amount by Novemebr 10 of the second year the FUTA CREDIT rate for employers in that state is reduced until the loan is repaid by the state. The reduction is .3% for the first year and an additional .3 percent for each year through year three plus additional credit reduction offsets for the third through fifth year that the loan repayment criteria is not met.
As an example, let us assume that you are a NYS employer and it has been three years that the unemployment benefit loans remain unpaid. The credit reduction add back therefore is .9 percent. So in addition to the standard .6 percent FUI rate, an additional credit reduction rate of .9 percent is due bringing the total to 1.5%. Because any liability in excess of $500 needs to be deposited immediately, this can cause substantial penalties for the employer who fails to account for the additional credit add back when tracking the liability throughout the year. Unfortunately many small business accounting and payroll software systems need to be manually adjusted to account for the reduction in state SUI credit and if this is not done, the software will calculate the FUTA at .6% instead of (as in the case of NY employers in 2013) say 1.5% (.6% plus .9%). Thus where the software (such as QuickBooks) is calculating a FUI liability of .6% throughout the year instead of 1.5%, the employer could unknowingly be accruing under deposit penalties throughout the year. An simple illustration would be if assume that a small business had an annual payroll of $330,000 for 11 employees, the FUI taxable payroll of $77.000 for the year 2013 (11 employees @$7,000) without the credit reduction charge the liability at the end of the year would be $462 which would be paid with a check along with Form 940. However if the system is calculating a liability based on .6% at the end of the first quarter the balance sheet would show $420 however with the credit reduction the actual liability due for the first quarter would be $1,155. If the employer were to rely on the accounting system's inaccurate liability calculation they would expect to owe $420 at year end but instead be faced with a liability of $1,155 plus a penalty of at least 10% or an additional $155. If the IRS becomes aware of the problem and sends notices that are not timely paid, the penalty could increase to 25% or $289.
Increasing State Unemployment Insurance Costs- Additional Cost of Unemployment to Employers
Normally, a business that has a high layoff resulting in a higher than normal employees claiming unemployment benefits will pay a higher state unemployment experience rate. Businesses with a low lay off ratio enjoy a reduced experience rate as their contributions add up in their unemployment fund. However now as a result of the recession, minimum experience rates can be expected to double if not triple over the years. Add to that the additional FUTA cost and we are looking at substantial increases in business state and federal unemployment insurance rates. Additionally, when a state does not repay the loan from the federal fund, it is charged interest. It is highly probably that this interest will be passed on to the employer in the form of higher experience rates or an increased surcharge rate.
As experience rates are more difficult to increase, one of the ways that states such as NYS has increased the employer's cost of maintaining mandatory unemploymentt insurance is to increase the taxable base. Beginning January 1, 2014 NYS has increased the taxable base for wages subject to unemployment from $8,500 to $10,300 for 2014, a staggering 21.18% increase to the cost of NYS unemployment insurance, with continued gradual increases in the SUI base wages until it reaches $13,000 in 2026.
The bottom line is that as this recession and high unemployment combined with a struggling economy continue, the cost of unemployment insurance benefits could increase to a full 6% (federal and state combined). This could only be the beginning of the end of our free capitalist economy that has provided employment and business opportunities to hundreds of millions of Americans and has been a source of primary attraction to millions of immigrants who have made the United States the land of opportunity. Instead welcome the era of authoritarian capitalism in America.