Barbara’s Blog

Luddites were 19th century English textile workers who smashed the newly invented machines they feared would replace them. We now know that machines and other technology are enhancements used to increase productivity and don’t necessarily replace workers. Still, the post-recession economy may prove the Luddites right.

Technology replacing workers
New machines, software, cloud applications, and other technologies continue to debut. They help to make companies run more efficiently and, in many cases, using fewer workers. Earlier this year, AP reported “Some occupations are beneficiaries of the march of technology, such as software engineers and app designers for smartphones and tablet computers. Overall, though, technology is eliminating far more jobs than it is creating.”

Other findings by AP:

• Technology is enabling startups to launch with one-third fewer employees than in the 1990s
• Companies in the S&P 500 Index grew profits post-recession by one-third while cutting their payrolls in half

Low-paid workers
Those who have jobs may not have enough spending money to oil the economy. Kiplinger reported that 28% of workers are in jobs that earned them less than the poverty level (this is 5% more than in 2002). The Kiplinger Letter had it right: “An economy can’t grow if too many workers don’t have money to spend.”

The answer from some economists and politicians has been to raise the minimum wage. However, many small business owners have said that a higher minimum wage will force them to use fewer workers. What’s the right answer? I don’t know.

Conclusion
Early in the last century, the story goes that Henry Ford paid his workers $5 an hour, an unprecedented sum for the times, so that they could afford to buy the cars he sold. The real story (the reason for the high pay and how it was figured) may be somewhat different, but the lesson seems sound. In the short run, replacing workers with technology and paying low wages are helpful to the bottom line. I’m no economist, but it seems to me that in the long run, there may be few left to buy what we have to sell. The Luddites in the 19th century were concerned with their jobs; now it seems that they had a point when it comes to the economy.

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.

Earlier this week, the House passed the Mobile Workforce State Income Tax Simplification Act of 2011 (H.R. 1864). This bill would bar states from imposing taxes on workers until they have actually worked at least 30 days within their borders. If it passes the Senate, this measure would go a long way in helping simplify the regulatory burden of withholding taxes for mobile workers and reporting them to states outside of where a business is based.

Currently, in the 41 states in which there is an income tax on wages, the rules for withholding are not uniform. This creates confusion and complexity for small businesses that have a mobile workforce.

For a good discussion of this complexity, read an article from the Journal of Accountancy (you don’t have to be a CPA to understand it).

The measure, which just passed the House in a bi-partisan effort, would create a national standard by limiting withholding to the state or locality of the employee’s residence as well as to the state or locality in which the employee is physically present performing duties for more than 30 days.

A coalition of more than 495 businesses and organizations support the bill. And so do I! Urge your senators to do so now.

If you’ve been forced by economic conditions during the past two years to lay off workers and have given them various types of severance benefits, you probably paid Social Security and Medicare taxes (FICA) on those benefits. Now a federal district court has opened the possibility of refunds for prior FICA payments on certain payments to terminated workers. 

The problem
FICA—both the employee share and employer share—is owed on payments that constitute “wages.” The definition of the term “wages” is the crux of the problem. During the recent Great Recession, many employers offered terminated workers various types of payments, including severance benefits, downsizing payments, and supplemental unemployment compensation (referred to as SUB-pay). The tax law specifically allows SUB-pay to be structured in such a way as to avoid the “wages” label and, thus, become exempt from FICA.

New development
A recent court decision has extended the SUB-pay exemption from FICA to traditional severance benefits. In Quality Stores, Inc., the court said severance benefits could be treated the same as supplemental unemployment compensation and would not be treated as wages if three conditions are met:

1. There is an employer plan under which payments are made;
2. Workers are involuntarily terminated (temporarily or on a permanent basis); and
3. There is a reduction in the work force, plant closing, or other similar condition that triggers the terminations.

What employers should do now
Companies that have laid off workers in the past several years and paid FICA on severance benefits should meet immediately with their tax advisors to discuss the next step.

Some things to do:

• Determine whether you have a “plan” within the meaning of the law. If you do not have one yet, consider structuring one for any future layoffs. It may pay to work with a benefits expert for this purpose; the FICA tax savings from a properly-structured plan could be substantial if this court decision holds up.
• Look for an appeal of the recent decision. This could take a year or more.
• Consider filing a “protective refund claim” now for FICA that has already been paid. The deadline for employees who were involuntarily terminated in 2006 is April 15, 2010. (It’s too late to claim a refund for FICA paid in years prior to 2006 because of the three-year statute of limitations.) Refund claims are made by filing Form 941X for each quarter in which FICA was paid on such severance payments. The employer can file for the employer share alone, or for the employer and employee share (provided the employee’s share is disbursed to the former employees).