The New York “State” of Unemployment Taxes

In recent years, New York State business owners have definitely seen that unemployment payroll taxes are an exception to the rule that states, what goes up must come down. This has been true at both the state and federal level for unemployment taxes.

New York’s unemployment tax is based on a specific amount of an employee’s payroll factored by the employer’s rate, which ranges based on experience. In 2013, the applicable employees’ wages were the first $8,500 paid, which was then increased 21% in 2014. This change had an immediate impact on the bottom line of employers at a cost per employee of $144. The cost can add up fast depending on the size of your labor force.

On the federal level, the FUTA tax rate is generally 6% on the first $7,000 of an employee’s taxable wages. However, the effective tax rate is often reduced to as low as 0.6% as employers generally receive a credit for SUI tax payments up to maximum of 5.4%.  Unfortunately, this credit reduction gets limited for those states deemed “credit reduction states.”  In 2011, New York State became one of twenty states earning this designation.  So what does that mean for New York employers?

First, we need to understand what causes a state to be labeled a credit reduction state.  When a state can’t meet their unemployment liabilities, they can borrow from federal funds.  However, if the state has outstanding loans as of the beginning of two consecutive years, and does not pay back the balance by November 10th of the second year, they become a credit reduction state.  As a result of the economic downturn in 2008 and 2009, and the extended unemployment benefits from the Obama administration, NYS found itself borrowing to meet its unemployment obligations.  These borrowings have been outstanding  for five years now.

So New York is a credit reduction state, but the real question remains, what is the cost impact to you as an employer?  Starting in 2011, New York employers were subject to a 0.3% basic reduction to the eligible FUTA credit.  In each subsequent year since, an additional 0.3% was added on, aggregating to a 1.2% basic reduction in 2014, or $84 of additional cost per employee ($7,000 factored by 1.2%).  In 2015, the credit reduction will be up to 1.5%, resulting in an additional $21 cost per employee.

On a positive note, New York State continues to pay down the borrowings each year.    However, until New York repays the borrowed funds to the federal government, which was approximately 1.3 billion as of November 2014, this particular reduction will continue to grow 0.3% each year until the entire FUTA credit is eliminated.  If the amounts are repaid early enough, perhaps 2016 will see the removal of the basic credit reduction, equating to an estimated savings of $105 per employee.

If you have any questions or wish to discuss this topic further, please feel free to contact Ray Neubauer at RNeubauer@GKGCPA.com .

–Ray Neubauer, Partner