A Tax Hike All Business Owners Need to Know About

January 27, 2016

A recent increase in unemployment taxes (known as the “FUTA” tax or “unemployment insurance” tax) is being felt by businesses across Connecticut.

I’ve received many questions from local business owners about what this tax increase means for them. Here’s some important information all employers should be aware of:

  • This increase is a result of the fact that Connecticut has yet to repay a loan totaling almost $1 billion from the U.S. Department of Labor borrowed during the recession to pay for unemployment benefits.
  • That federal debt must be paid off by Connecticut employers.
  • In 2011, employers were tasked with paying back this loan plus interest resulting in a 110% increase up to $88 dollars per employee from the previous year’s tax of $42 per employee.
  • – This year, that number ballooned to $192 per employee.

What is the federal unemployment tax?

Under federal law, businesses are required to pay an unemployment tax to fund unemployment compensation payments received by individuals who lose their jobs. The state is not directly penalized for maintaining an outstanding balance on the loan. However, each year that CT fails to repay the loan, the federal unemployment tax that CT businesses pay increases by .3 percent. If that wasn’t a hard enough pill for employers to swallow, in the fifth year the loan is outstanding the federal government penalizes business with an annually increasing add-on tax. CT’s add-on tax was rolled out in 2014 at a rate of .5%.

Why is the rate increasing this year?

Following 5 years of federal unemployment tax increases, employers will now have to pay at an effective rate of 2.7 percent, up from the original .6 percent along with special assessments that go towards paying the loan interest.

Last year, Republican lawmakers asked the state to apply for a waiver for the Benefit Cost Rate add-on, which would have reduced the per employee tax from $192 to approximately $147. The administration chose not to apply, making Connecticut the only state with outstanding loans that did not apply for the waiver.

Please contact me to discuss this further should you find it necessary or if you have more questions about how this tax impacts you and your business.