Manufacturers & Distributors ARTICLE -

Higher Unemployment Taxes This Year?

Target Audience: Manufacturing and Distributing Companies, M&D Industry

Many manufacturers are wondering about the future of their profit margins in light of the still uncertain economy. One line item that appears in every manufacturer’s budget, though, is likely to increase this year: unemployment taxes.

Shouldering the burden

As an employer, you pay taxes to support state-run unemployment trust funds, which, in turn, cover unemployment benefits for laid-off workers. But continued high unemployment means that many trust funds’ payouts are outstripping their revenues. The result: decimated funds in a growing number of states.

Unfortunately, it’s up to employers to make up the difference, and many states are socking businesses with eye-popping tax increases to keep their systems afloat. If you’re not up-to-date on your evolving unemployment tax liabilities, your next tax bill could be an unpleasant surprise.

Unemployment insurance 101

The amount of money you pay into your state’s unemployment insurance systems is based on several factors, such as your company’s age, number of employees and number of former employees who have filed unemployment claims with the state. As with many other forms of insurance, the more claims you have, the higher your premiums.

Unemployment tax rates for employers vary from state to state, both in terms of the amount and how they’re assessed. Some states charge employers a flat fee for each of their employees who earn more than a certain amount in wages, while others levy a tax equal to a percentage of each employee’s earnings up to a set amount. In addition, employers pay a federal unemployment insurance tax to cover claims from the long-term unemployed.

States set minimum and maximum tax rates for employers, and those rates are subject to change. Typically, new businesses pay an introductory unemployment tax rate their states set, and businesses still operating after that introductory period, the length of which varies by state, pay a rate partially based on the number of employees they have laid off who later filed for unemployment benefits. That means struggling businesses — including manufacturers that were forced to idle plants and let workers go during the recession — are often hit with a bigger tax bill while they’re already having trouble making ends meet.

A sinking system

The recession has been particularly tough on unemployment trust funds because of still-high numbers of unemployed workers and the massive expansion of unemployment benefits since the crisis began. Because the unemployment rate remains high, the federal government has extended the number of weeks the unemployed can collect benefits, allowing 99 weeks of benefits in some cases.

As they struggled to keep up with payments, 31 states borrowed money from the federal government’s own unemployment account in 2010, racking up $41 billion in outstanding loans. To pay off those loans, 24 states raised their unemployment tax rates in 2010, and many are doing so again in 2011. Some states have laws that require they raise taxes when they borrow from the federal system, while other states raised taxes voluntarily to try to close the budget gap.

In many cases, the tax increases have been significant. Florida business owners who pay the minimum rate, for example, have seen a ninefold increase in their rates from 2009 to 2011. In Kansas and Alabama, the average unemployment tax burden per worker more than doubled in 2010.

A bigger tax bite to come?

New federal rules are likely to create an even bigger tax burden for businesses this year. The money the federal government has been lending to states for their unemployment funds had been tax free, but it is subject to a 4% interest rate starting in 2011 — meaning states will have to find the funds to pay the increased costs.

In addition, businesses in states that haven’t paid back their federal loans for two years will see a reduction in their federal unemployment tax credit, further padding their tax bills. That’s already the situation in Michigan and Indiana this year, and other states are in danger of missing the two-year deadline soon.

Employers can expect continued tax pain in the years to come. According to the U.S. Labor Department, the unemployment taxes businesses pay will balloon to $64 billion in 2015, up from $38 billion in 2009.

Impact on your company

So what’s the bottom line for your manufacturing company? Be cautious when it comes to decisions that could affect your unemployment tax liabilities. Whether an uptick in business means you’re ready to hire or losses have you mulling layoffs, a change in your workforce could affect your employment tax liability.

5 tips for managing your unemployment tax burden

Here are five strategies that may ease your unemployment tax liability:

1. Consider alternatives to hiring. Bringing on new employees means paying additional unemployment tax and also leaves you vulnerable to unemployment claims if you eventually have to let them go. Tread lightly if you’re not sure about your long-term staffing needs. Instead, you might want to turn to a temporary staffing company, because it will cover unemployment tax liabilities.

2. Clean house only if you mean it. Because of fluctuating demand for your products, your company may get caught in a cycle of hiring and layoffs. But states frown on employers that continually lay off workers, saddling those businesses with higher unemployment tax rates when former employees file new unemployment claims. While shedding employees may seem like the best way to trim your expenses, consider the effect on your tax bill before sending out pink slips.

3. Shop around for the best rates. State unemployment tax rates vary, and so do the federal unemployment tax rates and sanctions levied on businesses in each state. If your manufacturing business has locations in multiple states, you may be able to use those variations to your advantage. Before you hire new workers, research which states offer the most favorable rates and make your hires there if possible.

4. Make mergers and acquisitions work for you. If you merge with or acquire a new company, you may be able to take advantage of the other company’s established tax rate if it’s lower than yours. The other company may also have account balances or have made contributions to state coffers that you can recover.

Find out how our M&D accountants can add value to your business. Email us or call us at 1 (888) 875-9770.

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