Look Out for Higher 2011 Federal Unemployment Taxes

Janice Koermer, Director of Full Service

As 2011 draws to a close, unemployment claims and the lengthened unemployment period remains so high, many states have resorted to searching for additional sources of income -- such as increased state unemployment tax rates, and lower FUTA credits. These increased burdens on employers were just announced and will catch many unaware and unprepared.

Every state bases an employer’s state unemployment rate on actual claim experience from prior years. The extreme unemployment experienced during this recession and resulting increased claims have resulted in higher state unemployment rates, virtually nationwide. These rates have been steadily on the rise over the last several years, and show no signs of slowing. Many states have already started sending out the 2012 state unemployment rates, and increases in rates are expected.

Some states have borrowed funds from the federal government to pay the increased unemployment claims and they have just two years to repay the loans. If the loan remains unpaid as of January 1st for two consecutive years, and a balance is still due as of November 10th of that second year, the Department of Labor will determine that they are a “credit reduction state”. Employers who pay wages in these “credit reduction states” must pay an additional federal unemployment tax when filing its Form 940. While the Department of Labor does not make the determination until after November 10th, the additional federal unemployment tax is retro-active for all wages in that state from the start of the calendar year and can add up to a significant sum.

In 2010, only three states were “credit reduction states”: Indiana, Michigan and South Carolina. This year, however, the number of states impacted has grown dramatically to 21. The states with an outstanding loan balance for two years as of November 10th, 2011 are listed below, along with the additional federal unemployment tax that will apply for wages in these states:

.9% Michigan
.6% Indiana
.3% Arkansas, California, Connecticut, Florida, Georgia, Illinois, Kentucky, Minnesota, Missouri, North Carolina, Nevada, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, Virginia, the Virgin Islands, and Wisconsin

Michigan and Indiana have a higher rate because the tax goes up .3% annually for each year the balance is outstanding. South Carolina qualified for credit reduction avoidance and will not have an additional tax required for the 2011federal unemployment tax filing. For all other states, this is the first year the loan has been past due and the .3% additional federal unemployment tax will apply.

Be prepared – check with your tax professional to understand how you may be affected!