According to a Labor Department analysis, 27 states currently have about $40 billion in outstanding federal loans in order to meet cash flow needs to cover unemployment benefits. (As you know, unemployment benefits have been extended up to 99 weeks in previous Congressional action.) As a result, in at least 22 of those states, employers will very likely see in an increase in their payroll Federal Unemployment Taxes (FUTA) for 2011. This despite Congress’s decision not to extend the FUTA surtax that expired in June of 2011.
Employers can normally take a 5.4% FUTA credit reduction for amounts paid to state unemployment trust fund accounts. In other words, the FUTA tax rate is set at 6.2%, but employers are allowed to take a 5.4% credit that leaves states room to then fund the state’s unemployment trust fund with state payroll unemployment taxes. This leaves the adjusted FUTA rate at .8%. However, if states do not have enough funds to pay benefits and need to borrow from the Feds to cover benefit payments, and they are not able to pay those funds back in a certain period of time, by law, that 5.4% credit is reduced in order for the Feds to collect funds due to cover loan and interest costs.
In 2010, Indiana, South Carolina, and Michigan employers had to pay extra FUTA taxes due to FUTA credit reductions. According to the analysis, 19 additional states will most likely see a reduction of their 5.4% credit if loans that date back to 2009 are not paid back by Nov. 10, 2011. Those states are Arkansas, California, Connecticut, Florida, Georgia, Idaho, Illinois, Kentucky, Minnesota, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, Virginia and Wisconsin. Upon filing the year-end FUTA tax report, payroll departments for employers in these states will have to take into account the reduction in the state’ s FUTA tax credit and pay in the additional employer federal unemployment tax adjusted for the new rate.
The Labor Department estimates that states will most likely continue to borrow up to an additional $25 billion in federal funds to cover continuing unemployment benefits as unemployment continues to be a problem and state trust funds continue to be depleted. And Mr. Obama has just announced he would like to extend benefits even further.