By Candace Evans, BenePay

Most of us know that the recent recession impacts the ability of workers to find and retain gainful employment.  In some cases, it has also increased the cost of doing business. Michigan in particular, has been impacted by recent changes, and one having a major effect on employers is the FUTA tax credit reduction.

Employers are required to pay both state and federal unemployment taxes to fund the cost of unemployment benefits to workers at the state level.  State unemployment (SUI) taxes are collected as a percentage of wages, the rate of which is assigned to individual businesses according to an "experience" calculation that considers two factors (1) the amount of unemployment benefits against the employer in the past and the (2) ratio of payroll to taxes paid. Higher rates are assigned to employers with greater experience and new employers are given a base rate that can fluctuate the following year based on the previously mentioned factors.  This rating system is designed to account for fluctuations in the state's fund balance, on which benefits are drawn, so that higher unemployment rates result in higher tax amounts and vice versa.

The Federal Unemployment Tax Act (FUTA) is used to fund the state workforce agencies, and provides a fund against which the states can borrow when needed to pay benefits.  The FUTA tax is calculated as a flat 6.2% of the first $7,000 in taxable wages per employee.
The recession has affected Michigan employers' unemployment tax requirements, both at the state and federal level. SUI rates have increased due to rising unemployment, resulting in higher experience rates. Michigan employers subject to FUTA tax (excludes Indian Tribes, non-profit organizations, and governmental entities) experienced a change in their total tax rate as well effective January 01, 2009. In past years employers received a 5.4% credit reducing their FUTA tax rate from 6.2% to 0.8%.  In 2009, the amount of the credit was reduced by 0.3%, and will be reduced an additional 0.3% each succeeding year because the state has outstanding federal loans for two years, and the reduction will continue until the loan is repaid. The net effect on Michigan employers for this credit reduction is an increased amount of FUTA tax paid per employee from $56, to $77 per employee, and an increased amount of SUI tax for those employers that experienced a rate increase.

For additional information regarding this credit reduction, visit www.michigan.gov/uia.