The payroll tax debate on Capitol Hill is putting a spotlight on taxes for everyone in 2012, but especially employers. While many of us like to avoid knowing too many of the details about how much we pay in taxes and where all the money goes, area employers should take note of the known new taxes that they’ll be paying in the new year to budget for the increases.
For the past two years, payroll tax credits and tax cuts have benefitted both employers and employees. In 2010, Congress provided tax credits to employers for hiring new employees and in 2011 reduced the employees’ share of the payroll tax by two percent. That means American workers making $50,000 kept an extra $1,000 in their pocket. Last month, President Obama signed into law a two-month extension of the current two percent reduced employee rate with the hopes of making it effective for the full year.
Regardless of what Congress ultimately decides with the payroll tax, there are a couple of other taxes on the horizon that business owners need to be aware of. They include state and federal unemployment insurance taxes.
Because of the recession, one of the largest tax increases employers will continue to face is escalating unemployment insurance (UI) taxes. As many employers know, they pay the taxes to their states to fund the unemployment benefits provided to former employees who are out of work and collecting unemployment benefits. With more unemployed individuals who are collecting unemployment benefits for longer periods of time, these taxes are inevitably escalating to meet the growing need.
Employers may be shocked when they receive their unemployment insurance tax notices for 2012 between now and February. Maryland had an historic increase two years ago, in which some employers’ unemployment insurance taxes grew by 400 percent. While the Maryland tax rate table will not change for 2012, many employers will see higher tax rates as the full impact of past layoffs affects their tax rate. Employers in Virginia and the District should also expect higher UI tax liabilities. The taxes will be due on April 30, 2012.
The recession has also taken a toll on federal unemployment taxes. Virginia and 20 other states were forced to borrow money from the federal UI trust fund to pay benefits. This will mean higher UI taxes (as much as 50 percent more per employee) for employers who operate in these states. These increased taxes will be due by January 31, 2012.
Nonprofits are also facing serious UI financing challenges, as many have opted for the reimbursement method of funding their UI costs. Under this method, the employer is required to pay only when benefits have been charged against their account. Unfortunately, the economic downturn has negatively affected some nonprofits and layoffs have occurred. These nonprofits now must pay dollar-for-dollar for each dollar in benefits paid.
Thus, if a “separated” employee collects the full duration of regular benefits (26 weeks) and is eligible for $400 per week, the nonprofit will owe $10,400.
Finally, the Social Security wage base has increased for the first time in three years, up to $110,100 for tax year 2012. For the past three years, the wage base was set at $106,800. In addition, Social Security recipients will receive a three percent cost of living raise in January. Paying for the 2012 cost of living increase will come as greater taxes are collected from employers, the self-employed and high-wage earners. High-wage earners seeing an increase in their Social Security taxes are the folks defined as those earning more than $110,100 in 2012.
Charlie Wolf is chief executive of Payroll Network, an independently owned payroll management company operating in the Washington and Baltimore metropolitan areas.