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  Additionally, the 0.75% Michigan solvency is also repealed.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.