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COVID-19 and State Unemployment Taxes: What to Expect

In 2021, high levels of claims will continue to put pressure on State Unemployment Insurance (SUI) programs across the U.S.

David Feinberg
Dec 21, 20208 minutes
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As 2020 comes to a close, hope is on the horizon. Hospitals are receiving the first doses of COVID-19 vaccine this month, with supply to ramp up from here on out.

Your Guide to Navigating COVID-19

Use our guide to to answer common questions and keep your team safe and informed about COVID-19.

That’s the good news. The bad news is that the economic impacts of the pandemic are still raging, and we’ve got months to go before the world gets back to anything resembling normal.

Among the most worrisome of the economic impacts resulting from the pandemic is the level of new and continuing unemployment claims. These are straining states across the country—a trend that will continue to put pressure on State Unemployment Insurance (SUI) programs well into 2021.

How Unemployment Insurance Works: A Primer

Many Americans will experience unemployment at some point in their lives, filing for and receiving benefits that are funded in large part by a tax levied on businesses under the State Unemployment Tax Act. Generally, in states where your company has employees, you are required to pay tax on their wages to fund that state’s unemployement insurance program (SUI tax).

These state taxes also are impacted by federal laws and regulations. Each state deposits its SUI tax revenue into its account within the federal Unemployment Trust Fund (UTF). Employers also pay a separate Federal Unemployment Tax Act (FUTA) contribution, which funds administrative grants to states to help run their SUI programs.

In normal times, SUI tax revenue finances unemployment benefits. When revenue is greater than a state’s unemployment claim expenditures, the state’s account within the federal UTF grows. However, the opposite occurs during recessions and periods of economic recovery. States draw on their reserves and, as businesses struggle, new SUI tax revenues may not make up the shortfall. When this happens, states can borrow from the federal loan account within the UTF to meet their unemployment benefit obligations.

States can also extend beneficiaries’ unemployment benefits during tough economic times. FUTA generally pays for 50 percent of these extended benefits (EB).

The Pandemic’s Impact on Unemployment

COVID-19’s economic impact in 2020—lockdowns, loss of business revenue, and layoffs—coalesced into a perfect storm driving unemployment claims to record levels. Widespread business closures have also reduced new job opportunities in the market, which prolongs the average time people spend claiming state unemployment benefits.

This perfect storm continues to put immense pressure on SUI programs, pushing many of them into negative territory. To date, 21 state jurisdictions have borrowed a total of $44.3 billion from the federal loan account within the UTF to cover shortfalls.

The federal government’s efforts to address the unemployment calamity have largely been limited to the Coronavirus Aid, Relief and Economic Security Act (CARES). This $2 trillion relief package, signed into law in March 2020, created 100 percent federally funded extended benefits (EBs) administered through the states. These included:

  • Pandemic Unemployment Assistance (PUA) - allows freelancers, self-employed individuals, and others who are not typically eligible for unemployment insurance to receive 46 weeks of benefits.

  • Pandemic Emergency Unemployment Compensation (PEUC) - provides an additional 13 weeks of unemployment benefits to those who have exhausted state unemployment insurance.

  • Federal Pandemic Unemployment Compensation (FPUC) - provided $600 per week to all unemployed Americans.

  • Lost Wages Assistance Program - provides eligible claimants $300 per week, for up to six weeks.

  • Federal Support for Shared Work - fully funded states' shared work programs.

  • Reimbursements for Local Government, Non-profit, and Tribal Employers - the federal government agreed to reimburse half of unemployment benefits.

While Congress just reached an agreement on a new $900 billion aid package, things are about to get tougher across the entire UI spectrum—with negative effects looming for claimants, businesses, and states alike.

While some of these direct benefits to workers will get extended in the new package, states and local governments won’t be so lucky. Earlier in 2020, the Federal government allowed states to borrow to replenish their UI trust funds interest-free—and this pot is only just beginning to boil.

States’ interest payments on these loans start to come due in 2021, which will further exacerbate SUI revenue shortfalls—even as unemployment remains at elevated levels. New York, for example, borrowed more than $8 billion. Caught between a rock and a hard place, many states anticipate covering the shortfall through higher SUI taxes on businesses.

How SUI Tax Rates are Determined

SUI tax rates are established on a per-state basis, depending on where employees live/work. A company’s rate can be impacted by an increase/decrease in a state’s “wage base”—the maximum set amount of each employees’ subject earnings that can be taxed in a given calendar year. A wage base may change from year to year, and in some cases, is determined in part by state trust fund balances at the UTF. Wage bases vary greatly by state, from a low of $7,000 in California to $47,400 in Hawaii.

A state’s unemployment insurance tax rate also changes based on how many former employees have filed an unemployment claim in the past. Other factors in play may include benefit amounts paid over time; the amount of employer contributions toward unemployment, and whether the state has outstanding loans to cover unemployment.

As your PEO, Justworks calculates and pays SUI taxes, taking into account wage bases for your employees and rates set by states. The amount we charge our customers for these obligations is refreshed annually on Jan. 1, when most states’ wage bases reset, regardless of your start date with Justworks.

You should know that, this year, many states have delayed releasing final rates for 2021. Using historical information, insights from industry experts, professional actuaries, leading indicators and more, we are updating SUI charges at the start of the calendar year.

By doing so, we avoid our customers facing back taxes or increases later in the year that would apply retroactively and otherwise might result in large, unexpected charges. Should future governmental relief create a need to lower SUI charges—we will adjust charges as appropriate.

COVID-19 and 2021 Rates

While 2020 was a turbulent year for small businesses, there is a light at the end of the tunnel. We need to do everything we can to ensure that small businesses make it through that tunnel—because they will be the engine of economic recovery to come. While states may feel as if they have few other options, raising taxes on businesses will only serve to stall that engine.

Unfortunately, the chances of that happening are high if history is any indication. SUI tax rates increased in the wake of past major economic crises—average rates (a function of SUI tax rate and wage base increases together) shot up anywhere from 21% to 61% following the 1991, 2001 and 2008 downturns. As a result of the COVID-19 pandemic, average rates could potentially double in some states for 2021.

Again, while it is possible that the federal government could ultimately issue forgiveness for the states’ past and ongoing borrowing from the UTF, it is unlikely that such relief will come—if indeed it does—in time to make an impact during the first half of 2021. Some states have taken preemptive action on this front. California, for example, passed legislation to provide employers with some measure of relief from financial pressures resulting from COVID-related unemployment expenses. The Texas Workforce Commission (TWC), also issued a statement that it was holding out until the latest federal stimulus talks. But these are stopgap measures that kick the can down the line at best.

What to Expect and What to Do

The reality as we enter 2021 is that the unprecedented surge in unemployment insurance claims across the country have exhausted states’ unemployment insurance trust funds.

While earlier in 2020 the federal government allowed states to borrow to replenish their trust funds interest-free, the interest on these loans is now coming due—even as unemployment levels remain at critically high levels. These looming debt obligations, combined with high ongoing unemployment claims, mean states have to generate additional SUI revenue, putting small businesses directly in the crosshairs.

But with millions of Americans still out of work, there is only one solution that makes sense in the current pandemic economy. States must be allowed to continue borrowing for their unemployment insurance trust funds without accruing more interest. Further, the federal government must recognize the huge negative impact repaying these loans will have on businesses—especially small businesses—and design targeted relief for states’ debt associated with paying COVID-19-related unemployment claims during the height of the pandemic.

The National Association of Professional Employer Organizations (NAPEO) and Justworks are gearing up to launch grassroots campaigns aimed at turning back any efforts to increase taxes or burden small businesses with an even greater load as we enter the new year.

Other national business organizations—including the National Federation of Independent Businesses, the U.S. Chamber of Commerce, and Strategic Services on Unemployment & Workers’ Compensation (UWC)—also have begun engaging lawmakers for relief.

Ultimately, it’s your story that will matter. Consider getting in touch with your elected representatives to let them know how this tax increase will impact your business. Local trade associations and advocacy organizations often provide online gateways that make sending messages to lawmakers easy. New York firms, for example, can contact representatives here.

One common refrain emerging from 2020 is that “we are all in this together.” In that spirit, we at Justworks encourage our community and our customers to do their part in helping ensure that policymakers recognize the present issues with the state unemployment insurance system.

We need to ensure that any new federal relief puts states in a position to ensure that small businesses emerge from this pandemic healthy and financially whole—and ready, once again, to drive the employment engine in America’s economic recovery.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.