FUTA Credit Reduction, or Deadbeat States Stick It to Their Employers

As a small business owner, I get to talk to tax agencies, a lot. Often they send me notices that I paid too much, too little, too late, or I forgot to send it a form. I then have to take a break from real work to research if they’re right or not, and then either write a check, orĀ  call and wait on line to 15 minutes to an hour to tell an agent how their agency lost the funds, misdirected the money, or lost a form. And then, typically, I have to spent some more time drafting a letter to the address I’ve just been given to have a record of what happened, and telling them why I shouldn’t be fined, or if I am being fined, why it needs to be lower than the amount they’re asking for. I keep my calm by reminding myself that the representatives I’m talking to are just the pawns of bureaucrats and venal politicians, just as I am. But it does get trying sometimes.

And more recently, it got downright insulting. I received a notice I’d forgotten to file the form that was supposed to go with my annual 940 form for 2011. No worries, I thought; the taxes have been paid, all they need is the information to match up to it. I dutifully filled out the form using my accounting software, which handles all these things. One question I hadn’t seen before asked if I was in a “FUTA State” and the software had it checked off as yes because California is one such state. Then it ran the numbers and told me I’d inexplicably shorted the Feds by $42, even though at the end of 2011, I paid exactly the amount my software said I’d owed.

Looking in to it, I found out I owed the Federal Government $42 more not because of anything I‘d done, but because my state, California, borrowed extra money to cover its unemployment benefit costs and had stiffed the Feds by not paying it back. Does California owe it back with interest? Why, no, that would make the politicians squirm and gosh darn it, they don’t like that. Instead, the federal government and the state government concurred the right person to stick it to is the “little man” — the employers, who like me, have already been paying the unemployment taxes (which by the way, have been going up and up themselves) all these years. We’re defenseless, easy pickings, especially if we’re too small to have a full-time accountant with number OCD on staff and a tax lawyer on retainer.

Oh, and to sweeten the story, this extra tax is retroactive. Which means, if I hadn’t filled out the form late, I might never have known until the IRS sent me a notice telling me to pay the tax I didn’t know about when the tax was due.

How can this possibly be fair? As far as I can tell, the unemployment insurance I pay to the state of California doesn’t cover unemployment benefits, either. In 2008, we had to, with great regret, lay off Shiaw-Ling. She had been planning to exit and take her career further at another company already, so in our eyes, she would have more time to hunt for work, and she could work part-time as a consultant for us until then. With our blessing, she applied for unemployment, which we and she had already paid thousands of dollars into, and which had the additional benefit of giving her job leads and some training. Within four months, she’d found a new job, and with a few hops and skips, she’s now on her desired career path. (As an aside, that path has put her in Beijing for the past year, even though she’s a U.S. national.)

Shortly after Shiaw-Ling applied for her benefits, I was astounded to see our state unemployment insurance quadruple. When I called the California Employment Development Department about it, they informed me that our rates would be at the highest allowed rate until we had fully paid off all the money they paid Shiaw-Ling, and then some. I was astounded. So where does all the money we put in go? In retrospect, we would have been far better off just giving Shiaw-Ling a severance with the admonition to never, ever file a claim. In which case, unemployment insurance is the worst insurance ever — the insurance you’re required to pay in to, but which will cost you more just to use it.

When I fumed at the IRS agent about this FUTA Credit Reduction on my last chat with a tax agency, she tried to comfort me with the information that just because California was a deadbeat in the past, it doesn’t mean it’ll always be a deadbeat in the future. Sure. According to our last public vote, I am distinctly in the minority as a Californian who doesn’t believe in taxing people blind, so now we are all paying more in sales taxes as of January, and everyone above a certain threshold (which I don’t know whether I’ve reached or not until I run through all my expenses and deductions and income) has to pay more retroactively, meaning even those quarterly estimated tax payments may be short, sweetly leading to an even bigger chunk of change to pay out after the paperwork’s been done, and conveniently leaving the State free to levy fines on the assertion that businesses underestimated how much they owed. And having caught taxpayers unawares with a retroactive tax, they’ll be all the more surprised that the next year, taxpayers respond accordingly, whether by buying less or working less, and once again, they can’t pay the bills. Which they will then, again, stick to the proverbial little man, one way or another.


Leave a Comment

Your email address will not be published.