Payroll Tax Update: Many States to Increase Unemployment Wage Base

APS Customer Note: This payroll tax update is for informational purposes only. No action is required on the part of APS customers to comply with the information contained in this release.

As a result of the rise in unemployment claims this past year, several states have depleted their unemployment fund.  Those states are now increasing their unemployment wage base to replenish their funds.

What is unemployment tax?

Unemployment tax is a payroll tax that employers pay on employee wages.  It is not a tax withheld from employee wages.  Each state issues an employer an unemployment rate and establishes a state-wide unemployment wage base. The wage base is the maximum individual employee compensation upon which the unemployment rate will be applied.  For example, if a state's unemployment wage base is $10,000, an employer pays taxes on the first $10,000 of wages paid to each employee.  Assuming an employer unemployment tax rate of 2%, the employer would pay $200 in unemployment taxes, per employee earning at least $10,000 per year.

The unemployment rate is based on several factors, which we will address in a future blog article, so check back frequently. 

How does this effect your payroll tax expense?

Using the same example above, if the unemployment wage base increases by $1000, then the employer would pay an additional $20 per year, per employee.  To calculate your additional tax expense, reference the table below to see if your state(s) increased their wage base.  If so, take the increase (the difference between the 2009 and 2010 wage base), multiply the increase by your tax rate, then multiply the result by the number of employees that you expect to reach the maximum wage base.  Or, use the formula below:

                                    2010 Increase
                                X  Tax Rate
                                X  Number of Employees
                                =  Additional Tax Expense

APS clients can find their unemployment tax rate by clicking the SETTINGS tab in APS OnLine. Under the Company Preferences section, choose tax details to see your company's Tax Reporting ID & tax rate (shown as a percentage).