Graph of unemployment

Graph of unemploymentFirst of all, happy 2011! And what better way to welcome in the new year than with a discussion of spiraling unemployment insurance costs?

The continuing high rates of unemployment have strained most states’ unemployment insurance trust funds. ProPublica.org reports that 30 states have insolvent funds and are borrowing from the federal government; the American Staffing Association puts the number of states with insolvent funds closer to 35.

McClatchy Newspapers reported last month that “The federal government estimates the collective interest on the outstanding loans will total about $2 billion in 2011, while continued state borrowing is expected to stretch the outstanding loan amount to $65 billion by fiscal year 2013.”

States that borrow funds from the federal government to pay UI claims have two years to repay the loans—and the clock started ticking in November 2009. If they don’t, businesses in the state lose 0.3% of their federal credit for each year the loans are outstanding. Three of the states with insolvent funds—Indiana, Michigan, and South Carolina—are now in default on their loans, which means employers in those states will see an increase in their FUTA taxes. These federal tax penalties can range from $21 to $84 per employee if state loans aren’t paid by November 2011.

As members of an industry whose “product” is people and their work, staffing firms are likely to be hit disproportionately hard by these penalties. In November 2010, the American Staffing Association and dozens of other business and legislative groups petitioned Congress to grant two years of relief from interest on the loans to states and relief from automatic federal unemployment tax increases.

States are responding to the crises as well; several states have announced changes to their taxable wage base (the amount of each employee’s gross wages subject to the tax) for the new tax year. According to the American Payroll Association, 16 states have raised their taxable wage base for 2011.

Many states haven’t announced their plans for raising, lowering or maintaining their wage base, which can be risky for staffing firms. States are allowed to raise the taxable wage base during the year and make the increases retroactive to Jan 1. Be sure to check with your tax specialists throughout the year to make sure you’re consistently in compliance with your state’s unemployment insurance requirements.

This could be a very … interesting year for staffing firms. If it helps, remember that we’ll be in the thick of it with you.

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