Several recent news reports are projecting state unemployment taxes to double or even triple this year as states request sizable loans from the federal government to replenish their unemployment trust funds.
This is just one more reason it makes sense for Davis-Bacon contractors to use the fringe portion of the prevailing wage for bona fide benefit plans. Every dollar paid as cash wages to hourly workers will be subject to these higher tax rates, putting a squeeze on already slender profit margins.
So far 32 states and the US Virgin Islands have outstanding loans with the Federal Unemployment Account. These loans must all be repaid. And while some states received interest-free loans under ARRA, if those loans are not repaid within two years, states with outstanding balances will lose a portion of their FUTA credit for each year the loan remains unpaid. In order to repay these loans, states have few options other than raising their unemployment taxes, and these increases may be necessary to replenish state unemployment trust funds well after employment improves.
Some states, such as Virginia, impose automatic rate increases across the board when the unemployment trust fund falls below a certain level. Others, such as Michigan and Texas, use an “experience rate” which imposes higher taxes on companies which have a history of more layoffs and claims. In some states, such as Florida, employers will see an increase on both the taxable base* and the minimum tax rate for unemployment. The impact to Florida’s employers is projected to be between 70 and 1200 percent. Because of the increase to both the taxable base and the minimum tax rate, even employers with excellent claims histories and no lay-offs in the previous six fiscal quarters will still receive an increase of 21% to their unemployment taxes.
According to the Texas Workforce Commission, unemployment taxes in that state will nearly double across the board in 2010. In Washington, the increase in the tax rate will be smaller – however, it is charged on a much larger portion of an employee’s wages. Texas taxes the first $9,000 in earnings, while Washington taxes the first $36,000. In Virginia, the state unemployment tax that business pay on each employee will increase from an average of $95 per employee per year to an average of $171 per year in 2010, $234 in 2011 and $263 in 2012, based on an additional levy of .2 percent to be included in the final tax rate assignment, according to the Fredericksburg Free-Lance Star.
Needless to say, these increases come at a time when many businesses, especially smaller businesses, are already struggling. Removing these taxes from the fringe portion of the wage on Davis-Bacon jobs has always been a sound financial decision. In light of the increased state unemployment taxes which are being predicted, making this move is one way to put some breathing room in an employer’s budget.
*State unemployment taxes are based on two factors: the taxable base as determined by the state and an individual employer’s tax rate, which varies within a range of rates set by the state.