Business Owners Pay Big For Lost Employees
Small-business owners can learn from management examples outlined in a recent Wall Street Journal Article.
At Amazon Reptile Center Inc., owner Scott Solar is paying for the pink slips he issued.
After several years of growth, the company, which has two reptile pet stores in Montclair and Covina, Calif., ran headfirst into the recession. As employees left, they weren't replaced, but recently the company decided to let go of three workers. In three years, the staff shrunk to five from 12. Now, like many owners, Mr. Solar will be paying a higher state unemployment insurance tax as a direct result of those layoffs.
State unemployment insurance taxes are paid throughout the year, as owners pay their other payroll taxes. States typically have a base unemployment tax, which owners will pay according to the size of their payroll. But as a company lays off employees, it develops a negative history or so-called "experience rating" that can boost that tax.
"We didn't know there were repercussions, but we had to do it," says Mr. Solar of his thin staff. "But now we're going to be punished for keeping the business alive."
Adding to the burden, a number of states are running out of funds to pay for their out-of-work populations. With jobless claims swelling and coffers depleting, at least 35 states are hiking unemployment tax rates this year, according to a survey by the National Association of State Workforce Agencies conducted late last year.
"This has been a gradual problem, and like a cancer, it's been spreading as more and more states hop on the bandwagon," says Henry Atkinson, a financial consultant for staffing solutions provider Ajilon, part of Adecco Group North America in New York.
The tax increases will impact thriving businesses as they expand their payroll, as they will have to pay based on their growing wages. But the hikes are more detrimental to firms that have laid off employees recently.
"The business that has laid off folks gets hit proportionately higher because while they pay less in total wages, and therefore less in employment taxes, their experience rating will go up and it takes numerous quarters of no layoffs to get that experience rating back down," says Henry Paula, a tax principal at Reznick Group PC, in Bethesda, Md. "Things are tough already for them, so this is a big deal."
Jim Garland, owner of Sharp Details Inc., pays state unemployment taxes in the six states where his airplane-cleaning and custom-detailing business operates. Four of those states have increased tax rates recently.
Taking into account the vacillating base tax rates in all six states, Mr. Garland says he's paying about 7% more than three years ago. "From 2007 to 2008, there was no increase. From 2008 to 2009 there was some. But between 2009 and 2010 there was a big jump, which I see as a direct correlation to the unemployment levels," he says.
Some employers are bracing for higher increases, particularly if they have had multiple rounds of layoffs or are located in hard-hit states. According to the NASWA survey, the unemployment insurance tax increases vary widely from state to state, with a median of 27%.
Mr. Garland's 55-employee company has been growing and adding staff, so his state tax rates have remained at the base levels, but because some of those base levels have been rising, he's been burdened by the cost. "When the economy was rolling, we could… explain we need to pass costs along," he says. "But now the customer is facing the same squeeze and wants lower prices."
Meanwhile, payroll tax breaks have become a priority on the federal level. In January, President Barack Obama proposed giving firms a $5,000 tax credit for every new job added and, for those firms expanding payroll, a payroll tax holiday on the 6.2% Social Security tax. A watered-down version of the proposal passed in a $17.5 billion jobs bill earlier this month, relieving employers from Social Security payroll taxes on new hires and giving them a $1,000 tax credit if the workers stayed on for a year.
It's difficult to evaluate whether the good news from the federal level outweighs the bad news from the state level, financial experts say. Johanna Sweaney Salt, a CPA at Kaufman, Schmid, Gray and Salt LLP, says growing firms may find the federal tax breaks lucractive in states where unemployment taxes are only marginally increasing.
But others, such as Mr. Atkinson, say there's no clear-cut answer. "For most businesses, the [state] payroll tax hike starts to bite pretty hard," he says.
Mr. Solar, the pet store owner, doesn't see federal tax breakss helping him, as he is in no position to hire. "To take advantage of a tax credit, I need to make a profit and I'm not," he says.
Mr. Garland thinks the federal tax breaks are too restrictive. For example, the provisions outlined in the recently-passed jobs legislation will only apply to new employees who have been out of work for two months.
"When the government helps you out, it's extremely complicated," he says. "You have to set aside a weekend to find out if it'll help you and, at the end of the day, it might not. But when there are new taxes…it's just across the board."
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