Barbara’s Blog

As an employer, you have to pay federal unemployment tax (FUTA) in addition to your state unemployment tax. The federal tax is figured on the first $7,000 of wages for each employee. The FUTA tax rate is 6%. This rate is reduced by a tax credit for state unemployment insurance.

The credit rate for state unemployment insurance normally is 5.4%. However, if states borrowed money from the federal government to pay their unemployment claims and have failed to repay the money, then employers in those states (called “credit reduction states”) have a reduced credit.

Technically states have until November 10 to repay their loans, but as it stands now, employers in 26 states are looking at additional FUTA taxes.

Employers in Indiana and South Carolina could have a credit of only 4.5% (a credit reduction of 0.9%), resulting in $63 additional FUTA tax for each employee

Employers in Alabama, Arkansas, California, Connecticut, Florida, Georgia, Illinois, Kentucky, Minnesota, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, Virginia, and Wisconsin could have a credit of only 4.8% (a credit reduction of 0.6%), resulting in $42 additional FUTA tax for each employee

Employers in Arizona, Colorado, Delaware, Kansas, and Vermont could have a credit of only 5.1% (a credit reduction of 0.3%), resulting in $21 additional FUTA tax for each employee

On a per-employee basis, the additional tax isn’t much. But the principle of the higher tax is significant. You — the employer — are penalized because your state has not been able to manage its finances well enough to avoid borrowing or repaying loans on time. It is likely you are based in a state with a high unemployment rate. And there’s nothing you can do about it (other than relocating).

The Department of Labor determines which states are credit reduction states; the IRS posts these states and the amount of the credit reduction late in the year. For 2011, for example, there were 21 credit reduction states, with credit reductions ranging from 0.3% to 0.9%.

I’ll be on the lookout for the final tally of credit reduction states for 2012.

The national unemployment rate in May 2012 was 8.2%. Five states (California, Nevada, New Jersey, North Carolina, and Rhode Island) and the District of Columbia had considerably higher rates (as much as 11.6% in Nevada).  For those who are unemployed, or underemployed, the lack of job opportunities has meant personal and financial challenges. They have been forced to tap into or even drain savings, rely on help from family and friends, or even turn to government programs for assistance. But their individual experiences pale in comparison to the loss to our country — it’s been a real talent and money drain.

My daughters are good examples. Each has a graduate degree but both have been stymied by the economy to make full use of their talents. My older daughter was laid off from her prestigious job as a clothing designer with a Fortune 500 company at the start of the recession. Since then she hasn’t been idle; she earned a master’s degree, had a baby, and continued to do contract work in her field. My younger daughter, who does advocacy for a nonprofit organization, has been essentially locked into a job with no prospects for growth; she even had to take a pay cut. Think of the designs that never got made, and the programs that never were advanced.

Now multiply these examples by the millions of similarly-situated, very talented, well-educated individuals who are unemployed, underemployed, or stuck in dead-end jobs. The country has lost the benefit of ideas, innovations, sales, and other indices of productivity. The country has also lost the ancillary benefits that result from the income that these people could have earned. Think of the taxes they would have paid, the houses and furnishings they would have bought, the investments they would have made. Also, think about the drain on the public resources to pay for unemployment benefits, food stamps, and other assistance programs.

Bottom line: I’m a big proponent of self-employment — creating your own job by starting your own business. But this route is not for everyone. The vast majority of people prefer, or are better suited, to be employees in someone else’s business. The sooner the economy starts to move at a much better pace than it currently is, the sooner the country will benefit from improvements in employment.

Jobs numbers announced on February 3 were surprisingly good. More jobs were created than had been expected and the nominal unemployment rate dropped. Maybe we’ve turned a corner in the economy and can expect things to continue to improve. At least that seems to be the sentiment from the Wells Fargo/Gallup Small Business Index for the fourth quarter of 2011.

The Index shows:

• Small business hiring intentions are the best since 2008
• 22% expect to increase the total number of jobs in their companies over the next 12 months

But looking closer at the results of the Index, there are some disturbing finds:

• Only 26% of small-business owners said they would hire full-time employees, compared with 72% who said they’d rather add temporary or contract workers (36%) or part-time workers (36%)
• 21% of owners said it is very to find the qualified employees they need for their businesses; 32% said it was somewhat difficult to find qualified employees

Why these disturbing results? It doesn’t look like small businesses are doing any significant job creation. Small business traditionally has been responsible for 60% to 80% of all job growth, but in recent years it has been lagging in this regard and likely will continue to do so.

Maybe owners are still feeling shaky after the recession and don’t want to commit to full-time workers at this time. Maybe tax uncertainty, the potential costs of health care, and regulatory burdens continue to plague small business owners.

For a robust economy, we need to create about 2.5 million jobs each year (4 million were lost during the recession). But maybe we need to reexamine the jobs that are needed so people can be trained to do them. Manufacturing jobs likely will continue to decline over time (despite a recent uptick).

I’m not an economist; I’m a small business owner who speaks to other owners. The consensus is that the environment for hiring is still not good. But let’s remain hopeful!

On July 1, 2011, the federal unemployment tax (FUTA) rate is scheduled to drop. This is the date on which a 0.2% surtax is set to expire. But don’t spend your tax savings yet. Things could change soon.

FUTA tax
FUTA tax, which covers half of extended unemployment benefits paid by the states as well as providing funds for states to borrow to cover their unemployment benefit obligations, applies to the first $7,000 of each employee’s wages. The FUTA rate is 6.2%. After June 30, 2011, the FUTA tax rate is scheduled to decrease to 6.0%.

This rate, however, is not necessarily the rate that you pay. You are entitled to a credit for state unemployment taxes. If you are entitled to the maximum credit of 5.4%, the FUTA tax rate after credit becomes 0.8% (0.6% after June 30, 2011).

The maximum credit applies if:

• You paid your state unemployment taxes in full, on time, and on all the same wages as are subject to FUTA tax, and
• Your state is not determined to be a credit reduction state (it has not repaid the federal government the borrowed funds it borrowed). For 2010, Indiana, Michigan, and South Carolina were credit reduction states. Instructions to Form 940 detailed the extent of the credit to which employers in these states were entitled. It is too early to know which states will be credit reduction states in 2011.

History of the surtax
The FUTA surtax was originally enacted in 1976 to fund the extension of unemployment benefits. The loans used to fund the extended benefits were retired in 1987, but the surtax continued. The surtax has been extended seven times, most recently by the Worker, Homeownership, and Business Assistance Act of 2009.

When the FUTA tax took effect in 1939, the wage base was set at $3,000; it was raised to $4,200 in 1972, $6,000 in 1978, and the current $7,000 in 1983.

Looking ahead
The Administration wants to make the surtax permanent and raise the wage base on which the FUTA tax is figured. Under budget proposals for fiscal year 2012, the wage base subject to FUTA would be increased from $7,000 to $15,000 (starting in 2014), and adjusted annually for inflation (starting in 2015).

The U.S. Chamber of Commerce wants the surtax to disappear and opposes any increase in the wage base.

Here’s my take on the tax proposals: FUTA tax, which may seem modest compared with other taxes, is yet another payroll burden. This serves as a disincentive for hiring at a time when more jobs is what the economy so desperately needs. Hiking the wage base and again extending the surtax is a measure that works against job creation.