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Unemployment Tax Rate Increases Expected

The Biden Administration’s decision to extend unemployment benefits in response to the COVID-19 pandemic may significantly increase employers’ unemployment benefit tax costs for years to come.

Employers fund unemployment benefits through federal and state taxes — except in three states — Alaska, New Jersey and Pennsylvania, which assess unemployment taxes on employees. The Federal Unemployment Tax Act (FUTA) tax is imposed on the first $7,000 paid to each employee. The State Unemployment Tax Act (SUTA) requires employers to pay a tax on the taxable earnings of employees. In most states, that ranges from the first $10,000 to $15,000 an employee earns in a calendar year. These funds go into a state unemployment insurance (UI) fund.

In the past, unemployment benefits in most states were paid for a maximum of 26 weeks, ranging from 12 weeks to 30 weeks. Responding to the forced economic shut down due to the pandemic, the administration extended unemployment benefits an additional 24 or more weeks. However, under the new American Rescue Plan, unemployment insurance will be extended through Labor Day 2021, a total of 53 weeks of additional benefits.

The result is that state UI benefits have been depleted. To replenish this fund, employers most likely will have to double the percentage of employees’ wages they pay for UI programs for the next two to three years. While experts believe employers will feel some impact in 2021, they believe the real impact will be hit in 2022 and later as federal loans to the states must be repaid.

Employers who want to be proactive should take the following actions:

  • Discuss the expected rate increases with their UI claims manager
  • Conduct unemployment fraud exams to filter out fraudulent claims
  • Review their tax rate for layoffs and correct errors to their rate.