The Burden of State Unemployment Taxes | DCR Workforce Blog

The Burden of State Unemployment Taxes

The unemployment tax burden in the U.S. is estimated to increase to $75 billion by 2013 from $38 billion in fiscal year 2009, according to the non-partisan Congressional Budget Office as reported in its federal budget outlook last year. And it’s expected to remain in the $78 billion to $84 billion range through 2020.

Audits galore!

The recent recession and consequent unemployment levels have really rendered the reserves in the state unemployment insurance programs very low. The states are burdened with huge bills for the unemployment benefits and are considering the various ways in which they can re-fill their coffers. This situation is fraught with tremendous risk for companies which can expect a flurry of verifications and audits – which could affect two types of possible violations.

– The primary drive would be against mis-classification, because catching any violations would improve the inflows, as tax can be collected from employees but not independent contractors.
– The other violation of SUTA is known as SUTA dumping wherein employers to try and evade the higher unemployment insurance rating issued to them by shifting the payroll to a different entity with a lower rate – and dump the first entity with the higher tax rate and keep it out of the picture, though there is essentially nothing.

While we are quite aware of what would happen in cases where mis-classification is caught, if SUTA dumping is proven, it could result in payment of taxes at a higher rate with interest and of course, do not forget the penalties.

Higher Taxes/Wage Bases:

While regulatory enforcement efforts are expected to bring in the funds, most states are either increasing the average rate on taxable wages or increasing the taxable wage base or both. At the moment, there is a substantial variation between the various applicable wage bases considered by the different states. The information on these increased rates is public; but rate increases (which are complicated and vary by company) do not attract as much attention and political pressure as wage increases.

Staffing companies face problems with rate increases while temporary employees may actually not be affected by the wage base increases because in most cases, they may complete their assignments before they exceed the taxable wage base. While staffing companies are striving to protest the additional burden and hoping for relief, life goes on and violations are not going to be tolerated.

As small and personal businesses (read, independent contractors) are expected to grow by 11 million by 2018. As per predictions, there will be no middle zone between employees and contractors. In all this, it is very important for those who are accountable, like HR, to stay alert and proactive and to avoid possible liability for any violations.

The content on this blog is for informational purposes only and cannot be construed as specific legal advice or as a substitute for competent legal advice. They reflect the opinions of DCR Workforce and may not reflect the opinions of any individual attorney. Do contact an attorney for advice specific to your issue or problem.
Lalita is a people/project manager with extensive experience in operations, HCM and training and development across industries like banking, education, business consulting, BPO and information technology. She believes in a dynamic approach to life and learning as change is the only constant.