Federal unemployment tax credit reductions are likely to affect multiple states for 2022, and employers should prepare to pay additional costs, payroll professionals said March 22.
The high unemployment rates caused by the pandemic led multiple states to borrow from the federal unemployment account, said Douglas Holmes, president of Strategic Services on Unemployment & Workers’ Compensation (UWC). If the loans are not repaid by Nov. 10, the amount of the tax credit permitted under the Federal Unemployment Tax Act would be reduced in those states for 2022.
Nine states and the U.S. Virgin Islands are at risk of being assessed credit reductions, Holmes said at the American Payroll Association’s Capital Summit. The states are California, Colorado, Pennsylvania, Connecticut, Illinois, Massachusetts, Minnesota, New Jersey, and New York.
The amount of a credit reduction generally increases by 0.3% each year, increasing the effective federal unemployment tax rate, Holmes said. Assuming that a state is not assessed add-on credit reductions, it would take 19 years for the entire 5.4% credit to be reduced to zero and for the full federal tax rate of 6% to be assessed on employers in an affected state.
California will likely be assessed credit reductions for many years, Holmes said. After borrowing from the federal unemployment account during the last recession, the state was assessed credit reductions from 2011 to 2017.
Pennsylvania has used bond payments to avoid prolonged credit reductions in the past and could again use bonds to repay its current loan balance, Holmes said.
Massachusetts, which might also use bonds, is expected to prioritize repaying its loan, Holmes said. If the loan is not repaid this year, it is like to be repaid soon, possibly by 2023, he said.
To avoid continued issues under the Federal Unemployment Tax Act, states must be allowed to use pandemic relief funds to improve trust fund solvency and repay loans, Holmes said. Programs that more efficiently match unemployed workers to new jobs would also bolster state trust funds by reducing the length of time that claimants are receiving benefits, he said.
A measure is being considered by Congress that would waive interest accrued on the loans from Sept. 6, 2021, to Sept. 30, 2022; the interest would otherwise become due on Sept. 30, Holmes said. Many states enact additional assessments on employers to repay interest on federal loans, so waiving the interest would prevent higher unemployment tax costs, he said.
Potential UI Changes
A legislative proposal introduced by Sen. Ron Wyden (D) would fundamentally change the structure of the federal-state unemployment system, Holmes said.
The measure would create a new worker classification that would allow gig workers to collect unemployment benefits, Holmes said. The workers would not be classified as employees or employers, but there would be a payroll tax obligation, he said.
The measure would also impose the ABC worker classification test in all states, Holmes said. This provision could cause some confusion for employers and would be difficult for employers to apply effectively during the transition, he said.
The proposal highlights the complexity of attempts to overhaul the nation’s unemployment programs, Holmes said, Changes to the federal program would generally require states to update their programs in order to remain compliant, he said.
Unemployment Tax & Remote Work
The availability of remote work options has become a hiring issue that brings tax challenges that might be overlooked, said Mindy Mayo, managing director at KPMG LLP.
A survey that asked employers whether remote work had triggered filing in new states found that 49% of employers were required to file in at least one new state, with 8% filing in at least 11 new states, Mayo said.
When employees work remotely, it can be difficult to determine which state’s law covers those employees for unemployment tax purposes, Mayo said.
State unemployment tax coverage is determined by a four-part test, Mayo said. The test considers:
- the localization of the majority of an employee’s services,
- the location of the base of the employee’s operations,
- whether the employee performs services in the state from which services are directed and controlled, and
- whether the employee works in the state where they live.
The conditions are ordered in descending priority, and when one condition can determine the state where the employee is covered, the following conditions don’t need to be considered, Mayo said.
The localization of services test might not help determine the state of coverage when an employee is splitting time evenly between two states, Mayo said. Similarly, determining the base of operations also might fall into a gray area, she said.