Sky-high unemployment rates and months of unemployment benefits for many workers have pushed some states into the red with the federal government. A study by the Tax Foundation issued in October found that 34 states had borrowed from the federal government to pay unemployment benefits when the states’ funds dried up. A few states have paid off their debts, but with many states still struggling financially, they owe a combined $37 billion, and began paying interest this fall on the cash they borrowed.
How does this impact the small business?
State unemployment insurance taxes are based on a set schedule. Each state has minimum and maximum rates that are levied on a particular wage base. Employers that historically lay off many workers pay a higher rate than those that seldom have.
Depending on what state you are located in, you may have already seen your taxable wage base increase, or have experienced an increase in the minimum and maximum tax rates.
If your business is based in one of about 20 states that still owe money to the federal government, you’ll see your federal unemployment tax rise, and they’re payable in January 2012. Businesses in a number of major states, including New York, California, Illinois and Florida, will be hit.
How much more will I owe in unemployment taxes?
While the federal unemployment tax rate is 6.0%, the IRS grants businesses a 5.4% credit for paying state unemployment insurance tax. If a state hasn’t paid back the money it has borrowed from the feds, the credit is typically reduced by 0.3%, or $21 per worker, though the reduction in some states is higher. While $21 per employee might not seem like a large amount, it can have a big impact, depending on the number of people you employ, and your profitability. And until a state pays of its debt, the credit will be reduced each subsequent year. If we open up the history books, during the recessions in the late 20th century, it took many states a decade to pay off their debts to the federal government.
About the Writer
Susan Ladika has been a writer and editor for 25 years. Her freelance work has covered everything from business to travel to science to international issues, and have appeared in such publications as Science, Town & Country, HR Magazine, Developer, The Wall Street Journal-Europe, The San Francisco Chronicle, and many others. She has also done extensive editing as a newspaper and wire service editor holding positions such as the Tampa Tribune Bureau Chief.
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