Michigan unemployment tax

New Law Allows Michigan Unemployment Tax to Be Paid In Installments

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The Michigan Unemployment Tax applies to the first $9,500 of each employee’s wages during each year.  Once an employee reaches $9,500 of wages in a year, the employer does not have to pay unemployment tax on that employee’s excess wages for the rest of the year.  Businesses with low employee turnover tend to have larger unemployment tax liabilities in the first two quarters.  This is because employees (especially full-time employees) will hit the $9,500 wage limit fairly early in the year.  Employers with higher turnover have employees starting later in the year and will thus have taxable wages in later quarters.

Example:  ABC Corp has ten full time employees who earn $10,000 per quarter.  ABC Corp has a 5% unemployment tax rate.  ABC Corp’s total wages for the first quarter are $100,000.  Taxable wages for the first quarter are $95,000 (the first $9,500 of each employee’s wages).  ABC Corp’s unemployment tax due is $4,750.  As long as ABC Corp does not hire additional employees during the remainder of the year, ABC Corp will not have an unemployment tax due for the remaining three quarters of the year because each employee reached the $9,500 limit in the first quarter.

Beginning in 2013, certain employers will be able to spread their first quarter Michigan Unemployment tax liability over four equal quarterly payments.  For example, in the above fact scenario, ABC Corp has to pay $4,750 by April 25.  If ABC Corp qualifies under this provision, it can pay the $4,750 in four equal payments of $1,187.50 with its four Michigan unemployment tax returns for the year.

To qualify:

  • A business have 25 or fewer employees on January 12th of the prior year AND
  • 50% or more of the business’ total previous year’s tax were payable with the first quarter report.

If the business qualifies, it can make an election on its first quarter report and pay the first quarter tax over four quarters.   Beginning in the second quarter, the total amount due for each quarter will be the unemployment tax for payroll in that quarter plus the carryover of the first quarter’s tax.

Example:  It is 2013.  XYZ Corp had 20 employees as of January 12, 2012.  Its unemployment tax liability in the first quarter of 2012 was $5,000 and its total tax liability for the year was $8,000.  Since XYZ Corp had 25 or fewer employees as of January 12 of the prior year and 50% or more of its prior year unemployment tax was payable in the first quarter, it meets the requirements to spread its 2013 first quarter liability over four quarters.

Continuing on with the example—If XYZ Corp has $6,000 of tax due in the first quarter, $2,000 in the second quarter, $1,000 in the third quarter, and no tax liability in the fourth quarter, its 2013 Michigan unemployment taxes due will be:

1st quarter:          $1,500 (one quarter of $6,000)

2nd quarter:         $3,500 (one quarter of $6,000 plus 2nd quarter liability of $2,000)

3rd quarter:         $2,500 (one quarter of $6,000 plus 3rd quarter liability of $1,000)

4th quarter           $1,500 (one quarter of $6,000 plus 4th quarter liability of $0)

 

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 Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230

 

Changes to Federal and Michigan Unemployment Taxes for 2012

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There have been a number of changes to federal and state unemployment taxes over the past year.  This post will describe some of those changes.

Federal Unemployment Tax

As you may have noticed on your Form 940 (Federal Unemployment Tax) for 2011, there were two federal unemployment tax rates during 2011.  A 0.8% rate applied to wages through June 30, and a 0.6% rate applied to wages paid from July 1 to December 31.  This 0. 2% FUTA tax reduction was due to the repeal of the FUTA surchage.  The 0.2% surcharge was originally added to the FUTA tax rate in 1976 to shore up the federal unemployment tax system.  The surcharge is not tied to unemployment benefits workers receive, so the elimination of the surcharge will not affect unemployment benefits.  The FUTA tax rate for 2012 remains at the lower 0.6% FUTA tax rate.

State Unemployment Tax

As of last year, the State of Michigan owed $3.267 billion to the federal government to finance unemployment tax payments to the unemployed.  To help pay off this federal debt, the State imposed a 0.75% increase in state unemployment taxes.  Additionally, when a state is unable to repay federal debt used to finance unemployment benefits, businesses located within that state have to pay a higher FUTA tax rate.  Since Michigan was one of those states in 2011, it had to pay an additional 0.9% FUTA tax rate.  This 0.9% rate was in addition to the 0.8% and 0.6% tax rates explained above.

The 0.75% Michigan solvency tax was insufficient to repay the federal debt.  As a result, the State of Michigan issued $3.323 billion in bonds in December 2011 to repay the federal debt.  Since the federal debt is now repaid, the additional 0.9% FUTA rate will no longer apply in 2012.  Additionally, the 0.75% Michigan solvency is also repealed.  However, the Michigan solvency tax has been replaced with an Obligation Assessment which will be used to repay the Michigan bonds that were used to repay the federal debt.  This Obligation Assessment will be an increase to your state unemployment tax rate beginning in 2012.  In Michigan, 100% of unemployment insurance is employer-funded, so Michigan employers will be responsible to repay the bond issue.  The Obligation Assessment is based on your current state unemployment tax rate and will be roughly one-half to three-quarters of a percent.  Bottom line:  the Obligation Assessment will be roughly equal to the state Solvency Tax, but employers are slightly better off because the additional 0.9% FUTA tax rate will no longer apply.

There are other changes (i.e., tax increases) to Michigan unemployment taxes as a result of the bond issue:

  • the tax base is increased from $9,000 to $9,500 (In 2011 employers paid state unemployment taxes on the first $9,000 of wages.  Starting in 2012, employers will pay state unemployment taxes on the first $9,500 of wages.)  However, if the state Unemployment Trust Fund reaches a certain surplus amount, the tax based will be lowered to $9,000.
  • The part of your unemployment tax rate that is based on your employees’ unemployment claims is changing.  Prior to 2012, the tax rate was based on the past 5 years of unemployment claims.  In 2012, the unemployment claims experience component of your tax rate will be based on 4 years of unemployment claims and in 2013, 3 years of unemployment claims.

Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.

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