Unemployment Tax Increase Tough on Small Businesses

By January 6, 2010 Businesses

While business owners are scraping together money to grow and hire new employees, Florida is among many of the states increasing payroll taxes to cover the unemployed.  There could be an unemployment tax increase of 1000% for some companies.

State unemployment taxes have been on the first $7,000 of each individual’s wages and had recently reached rates as low as .1%.  This made it so that many small businesses were rewarded for providing steady employment and would hardly feel the pinch of $7 per employee.  Last year the minimum rate hit .12%, or $8.40 per employee.

With unemployment reaching double digits, many states have nothing left in their unemployment compensation funds.  The result here in Florida is drastic action.  For starters, the wage base is increasing from $7,000 to $8,500 which means that businesses will be taxed on an additional $1,500 in wages for each employee.  But the real kicker is that the Unemployment Tax rate is jumping from .12% to more than 1.1% making the new minimum tax per employee $100, up from $8.40.  This tax hike will hit even the most consistent employers.  Just as an example, if you had 5 employees and paid $42 in Unemployment Tax last year, expect to pay $500 this year.

Also on the horizon are more Unemployment Tax audits and compliance enforcement.  The state can get additional funds from the Federal Government, but only if they have met their audit quotas.  Auditors are looking at some specific areas.  First, they want to make sure your reports match your Federal reports and the actual paychecks taken.  Second, they will be heavily scrutinizing sub-contract labor and other non-employee labor that receive 1099’s.  Also, they will be looking to make sure that owners are being reasonably compensated for their work instead of skipping payroll taxes by only taking distributions.  We recommend ensuring that S-Corporation shareholders who are active in their company take reasonable compensation for their position.  You may think that as an S-Corp shareholder you only have to pay yourself up to the wage base of $8,500 to keep Florida auditors happy, but they are working in conjunction with the IRS and will report you to the IRS for not taking what the IRS considers to be reasonable compensation.

If you have questions about what is reasonable, please do not hesitate to contact us.