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  • Writer's pictureNick Andriacchi

Are Employers Facing Higher Unemployment Rates?

Even though the employment numbers came in better than expected this month, wide spread unemployment still remains. Of particular concern, if this lasts for a prolong period of time, state unemployment insurance funds may run dry forcing the state to borrow from the feds. If that happens, the Federal Unemployment Tax (FUTA) charged on each employer’s payroll could increase each year until that debt owed to the federal government is repaid.

Unemployment taxes have a huge effect on a staffing company’s bottom line. The regular, pre-pandemic program is funded by taxes on employers, including state taxes (SUI - which vary by state) and the Federal Unemployment Tax Act (FUTA) tax, which is 6 percent of the first $7,000 of each employee’s wages. However, employers who pay their state unemployment taxes on time receive an offset credit of up to 5.4 percent, meaning that the FUTA tax for an employee earning $7,000 or more may be as little as $42. The credit is reduced in states (for all employers) that are overdue in repaying unemployment insurance debt owed to the federal Treasury.

This means that the federal tax rebate that employers receive for paying their taxes on time will be reduced (usually by 0.3 percent per year, cumulatively, until the state is able to repay its loan). These federal tax credit reductions place a higher tax burden on employers. Even worse, I would expect individual state unemployment tax rates (SUI) will go up as well without congressional action.

For example, Michigan staffers may remember that after the Great Recession, the state borrowed $3.7 billion from the federal government because the fund ran out of money. As a result, employers in Michigan paid 1.7% in FUTA (instead of .8%) on the first $7000 in wages per employee. SUI rates remained high as well.

Congress will need to address this, otherwise employers (especially staffers) could get hit with higher unemployment insurance rates.

Just as a side note: when adding an extra $600 a week, maximum UI benefits exceeded 90 percent of average weekly wages in all states. About two-thirds of workers are making more from UI than they did when they were working, according to researchers at the University of Chicago’s Becker Friedman Institute. One out of five eligible unemployed workers will receive benefits at least twice as large as their lost earnings. I am certainly not disparaging these employees as they do need help but there may be better to provide relief in another form.

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