Each year the current President of the U.S. provides the fiscal year budget and any proposed changes for the new fiscal year.
President Obama is proposing an increase in the FUTA taxable wage limit from $7,000 to $40,000. This limit was last changed in 1983. He also proposes to reinstate the .2% surtax that was eliminated in 2011, but cut the .6% tax rate to .167% due to the increase in the wage base. This would require all states with unemployment wage limits under $40,000 to increase to at least this amount as well as a minimum tax rate requirement that would be roughly $70 per employee.
Currently only 2 states, Hawaii and Washington, have a wage base higher than $40,000. Several states’ wage base limit is as low as $7,000. What would this look like for employers with a wage base as low as $7,000?
Company ABC has 500 employees with a state unemployment rate of 2.5%.
Before the update assuming all employees are over the wage base of $7,000:
$7,000 * 2.5% = $175.00 per employee
$175 * 500 employees = $87,500.00
If the proposal passes to increase the wage base to $40,000:
$40,000 * 2.5% = $1,000 per employee
$1,000 * 500 employees = $500,000.00
This would result in an increase for Company ABC’s employer taxes expense of $412,500.00 ($500,000 – $87,500).
Since FUTA wage base is currently $7,000.00, this increase would also be $412,500.00 for a total employer unemployment tax expense of $825,000.00.
Keep in mind this is an example only and your company’s state wage base may currently be higher and your percentage lower or higher. Also, not all employees may have a $40,000 limit due to their rate of pay, hire date or termination date, etc. This is only a point of reference.
Should the FUTA wage base limit increase to $40,000? How would this affect your company?
- Would the company net profits cover these expenses?
- Would you need to accrue these expenses to help watch the company bottom line?
- Would your company need to cut some of its benefits offered to employees?
- 401k Match?
- Group Term Life over $50k? Only allow $50,000 per employee instead of x-times the employee’s wage base?
- No longer give certain bonuses?
In addition to the increase in the FUTA wage base, the 2017 Proposed Budget also changes the rules surrounding the FUTA credit reduction. Instead of the credit reduction being based on outstanding loans, a state’s Average High Cost Multiple (AHCM) would be used. This AHCM would determine if a state could pay estimated unemployment benefits for one year of an average recession. Any state with an AHCM of less than .5 for two years would be subject to the FUTA credit reduction. Since there are currently 3 states and the U.S. Virgin Islands that have outstanding loans with the Federal Unemployment Treasury, there were 30 states that did not have enough reserve to cover a one year recession based on the new proposal.
Other proposals that would affect payroll are included in President Obama’s 2017 Proposed Budget. More information.