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Federal Unemployment Taxes – Plan for Increases

As the January 31 deadline approaches to file your federal unemployment tax return, we thought this would be a good time to be sure you are planning for your future federal UI tax liability.

Because of the high unemployment experienced in Missouri (and everywhere else) beginning with the recession in 2008, employers in the State of Missouri still owe the federal government more than $320 million.

The liability resulted from the fact that more was paid out in unemployment claims than was being collected in state unemployment taxes.  As a result, the federal government “loaned” Missouri money to pay its unemployed.  This is a usual practice and usually the arrangement acts as a cash flow tool – amounts are borrowed early in the year and repaid later in the year with unemployment tax collections.  But when the unemployment remains high for a long period of time, a “perfect storm” develops.  At the same time more money is paid out of the fund to the unemployed, fewer taxes are collected because fewer people are working.

Missouri was not alone as many states have had to deal with this problem.  But the federal government wants their money.  So for every year the state has a balance with the federal government, the federal government reduces the Federal Unemployment Tax Act (FUTA) credits.  Missouri is one of 15 states in which the loss of FUTA tax credits is being used to repay the state’s balance.  This is where it gets complicated.

The federal unemployment tax is 6% of the first $7,000 in wages paid to each employee.  Normally, when a state’s unemployment fund is operating correctly and no outstanding balances are present, employers receive a 5.4% FUTA credit against this tax, leaving a net federal unemployment tax of .6%  But when the state owes the federal government UI money, this credit is reduced by .3% each year the state carries a balance with the federal government.

So far, Missouri employers have paid an additional .3% in 2011, .6% in 2012, and .9% will be due January 31, 2014, for the 2013 calendar year.  This means employers are paying $63 per employee more than usual for federal unemployment taxes (.9% times $7,000).

If the full amount is not repaid by November 1, 2014, an additional $21 per employee will also be levied for 2014.  This will mean Missouri employers will be paying about $84 more per employee than they would normally have to pay in federal unemployment taxes.

In addition to the tax recovery through the loss of these FUTA tax credits, Missouri employers are paying interest on the outstanding balance.  About $2 million is assessed in a separate interest charge on second quarter Missouri State Unemployment Tax returns.

AIM tried for years to get our state leaders interested in issuing bonds, as other states have done, to repay the federal outstanding loan balance and avoid FUTA credit loss and interest assessments.  Some argued that allowing the federal unemployment tax recovery to work simply accelerated the payback to the federal government and that bonding could actually extend the payback into another recessionary period.

Now that we are likely in the final two years of FUTA tax credit loss, some still talk of issuing bonds to repay the federal government.  At this point, issuing bonds could very well push the liability into a future recessionary period, making it more difficult for employers when that recession hits.  Complicating the matter further, the Board of Unemployment Fund Financing must actually issue the bonds.  The Board is made up of the  Governor (Chairman), Lieutenant Governor, Attorney General, Director of the Missouri Department of Labor, and the Commissioner of Administration.  Politically, allowing the federal government to increase employers’ taxes may be more palatable to a state politician than issuing bonds that must be repaid with an assessment at the state level.  So issuing bonds may not be the first choice of the politicians and political appointees that would need to issue them.

Employers should budget for this increased federal unemployment tax liability.  AIM will continue to work to reduce the amount paid in unemployment benefits to those that do not deserve such payments, and other ideas that will result in a more efficient unemployment system.

For more information, visit the Missouri Department of Labor website here.

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