Hi, here’s your HR quickie for today, November 19^th, 2024.

Hey there – we need to talk about something that’s going to hit your payroll very soon. Now, I know payroll taxes aren’t the most exciting topic, but this is important because it’s going to cost you more money per employee.  You see, the Department of Labor just announced this year’s credit reduction on unemployment.

OK, I know that sounds like word salad – but here’s what’s happening.

California, New York, and the Virgin Islands borrowed money from the federal government to pay unemployment benefits. And guess what – they haven’t paid it back. Now the federal government wants its money, and they’re going to get it from employers in those states.

I know it sounds alarming – but this isn’t new.  In fact, in California we have had this type of retro payment for the past few years.  But, it’s still a little painful – so consider this your heads up.

Every employer pays FUTA – that’s Federal Unemployment Tax. Normally, you pay 0.6% on the first $7,000 of wages for each employee. That works out to $42 per employee per year. Not too bad, right?

But you see, when there is a big load on a state’s unemployment fund, meaning lots of people are filing for unemployment – like during and after the pandemic – the states may have to borrow money from the Feds.  But those loans aren’t free forever. When states don’t pay back what they borrowed quickly enough, the federal government starts collecting – not from the state directly, but from employers through increased unemployment tax rates

It’s their way of forcing states to rebuild their unemployment trust funds. For California and New York, the bill is coming due, and employers in these states are going to see their unemployment tax rate increase as a result – and it increases retroactively.  So that means you’ll have a higher rate in 2024 than you already paid.

So, if you’re in California or New York, you’re going to pay 1.5% instead of 0.6%. That means you’ll pay $105 per employee – which is an additional $63 per person. And if you’re thinking “wait, didn’t we just have an increase last year?” – you’re right. The rate keeps going up until the state’s loan is paid back.

Now, here’s what you need to know for your budget and planning. First, this isn’t something that comes out of your regular payroll. You’ll pay this additional amount when you file your annual FUTA return – Form 940 – which is due January 31st, 2025.   Usually your payroll company will charge it in one of your regular payroll cycles in January so they can submit that tax payment.

Second, this isn’t a maybe – it’s definitely happening. The Department of Labor already confirmed it. Lucky Connecticut managed to pay off their loans and dodge this bullet, but California and New York didn’t.

Third, and this is really important – this trend isn’t going away. These unemployment funds aren’t magically going to replenish themselves. Until the states can figure out how to get their unemployment trust funds back to healthy levels, we’re probably going to see these increases continue.

So what should you do? Well, first, start planning now. Maybe have a conversation with your payroll provider or accountant to help you calculate how much is coming.  Trust me – there isn’t anything much worse than expecting your payroll amount to be one thing, and finding out it is thousands of dollars more than you expected.  So get ahead of this.

Also, keep this increase in mind when you’re doing your hiring plans for next year. I’m not saying don’t hire – but make sure you factor in all these costs when you’re making those decisions.

And one last thing – don’t try to get creative with how you classify workers to avoid this tax. The penalties for misclassifying employees as independent contractors are way more expensive than this FUTA increase.

This is just one more reason it’s so critical to stay on top of your payroll compliance and planning. And if you’re feeling overwhelmed by all this – that’s totally normal. Running a business isn’t easy, and keeping up with all these changes is a full-time job in itself.

Give us a call – keeping you HR and Payroll compliant is what we do – so you can be free to run your business.