Unpaid Federal Loans Means More Taxes on Employers (TRN Commentary)

By Gordon Friedrich (The Reserves Network Vice President, Corporate Counsel)

In previous articles, we have discussed how most states have taken federal loans to pay for the increased volume of unemployment claims. In Ohio for example, the totals loans currently exceed $2.4 Billion.

Since there is no money to pay back the loans before the end of 2010, Ohio will become a “credit reduction” state in 2011. What does that mean for Ohio employers?

Generally all employers pay, in addition to a state specific unemployment contribution on its payroll, a federal unemployment tax (FUTA) equal to 0.8% on the first $7,000 of each of its employees’ annual pay. The rate is actually 6.2%, but states are credited 5.4% if the state has no outstanding federal FUTA loans (6.2%, minus the 5.4% credit, equals 0.8% net FUTA rate).

Since it is expected that Ohio will not repay these loans before 2011, Ohio becomes a credit reduction state. All Ohio employers will have their FUTA “credit reduced” from 5.4% to 5.1% thereby increasing the effective rate by 0.3%.

In whole dollar terms, an employer historically paid $56 in FUTA for every employee who earned $7,000 or more during the year. With the credit reduction, another $21 will be added to that tax in 2011 for a new total of $77.

Ohio is not the only state where this will undoubtedly occur. Michigan has been a credit reduction state since 2009. Currently 32 states have outstanding federal loans, so the expectation is many states will face the credit reduction.

In an economy where the burden on employers is growing and taxes are increasing, another $21 per employee further reduces working capital and the ability to hire more employees.

Gordon Friedrich is the Vice President, Corporate Counsel for The Reserves Network, a provider of “Total Staffing Solutions” in the office, industrial, professional and technical markets. To contact Gordon, email gfriedrich@trnstaffing.com.