A business client recently shared with me that a prospective employee expressed an interest in being hired and eventually terminated. Why would someone seeking employment want to be terminated? The explanation was quite simple. The person seeking employment really wanted to build credits towards claiming future unemployment benefits which are continuously being extended. In other words, why work when you can sit home and have the government pay you to do so?
What many employers and individuals do not understand is that the federal and state governments do not fund the unemployment pool of dollars – business owners do! The federal government loans monies to the states to pay the benefits. This loan, as any loan, needs to be repaid and is charged interest while it remains unpaid. It is the business owner who is ultimately responsible for paying the benefits!This is similar to persons who have a mortgage on their homes and have insurance and real estate taxes escrowed by the lender. While the lender is the disburser of the funds, it is the homeowner who is actually funding these payments.
Every employer has an experience rating. This experience rating is based on the unemployment benefits paid by the state to the employer’s employees who are recipients of the benefit. Business owners who have a high turnover will have a higher experience rating (and tax rate) than employers who have little or no unemployment claims by their employees.
According to the PA Department of Labor & Industry, because of the recession that began in December 2007, PA’s unemployment rate climbed to 9.2 percent in May 2010, the highest rate since June 1984. In 2009, PA began borrowing from the federal government to meet its UC benefit payment obligations. The American Recovery and Reinvestment Act waived the interest on these loans through Dec. 31, 2010. This provision saved PA $145 million in interest in 2009 & 2010. However, interest will begin to accrue in 2011. A provision in PA’s 1983 UC Law requires the state to add an interest factor to UC employer taxes to fund payment of the federal loan. The interest factor, which has not been in effect since 1986, is determined annually by the Dept. of Labor & Industry at a rate necessary to pay the interest on the outstanding federal loans. For 2011, the rate is 0.44 percent and will be incorporated into every employer’s UC rate.
There is more bad news for employers! The tax imposed for 2011 under the Federal Unemployment Tax Act, FUTA, is 6.2 percent of wages paid through June 30 and 6 percent of wages paid for the remainder of the year. The FUTA tax is imposed on the first $7,000 of wages paid to each employee per calendar year. Normally, employers may claim a credit against their FUTA tax for contributions paid under the state UC statute, up to an amount equal to 5.4 percent of wages paid. However, because Jan. 1, 2011 will mark the second consecutive year that PA will have an outstanding balance on its federal loans to pay the UC benefits, the credit will be reduced by 0.3 percentage points to 5.1 percent. The additional FUTA tax for 2011 will be collected in January 2012 with the filing of the annual federal Form 940. The FUTA tax is used to fund state administrative costs, loans to states and UC benefit extensions.
The PA UC Tax Information Line is 1-866-403-6163 or 1-717-787-7679. The IRS Business & Special Tax Line is 1-800-829-4933.
