The attached Tax Intelligence details a recent Court ruling regarding severance pay and FICA. In a controversial decision, a sixth circuit District Court held that certain severance payments made outside a qualified supplemental unemployment benefits (SUB) plan were not subject to FICA tax since the severance payments were not earnings.

Please review the attached for further details, including a possible option which might be advisable to preserve the right to a refund in the future when the case is finally resolved.

This communication was sent to our clients on March 23.

Part 2 – The Early Years

On August 14, 2010, the Federal/State Unemployment Program will be Seventy-5 years old. I began working for the Florida Industrial Commission, Bureau of Unemployment Compensation, on January 5, 1970 (40 years ago). At that time, I was trained and supervised by individuals who were reaching the end of their careers in the unemployment program. These great pioneers set the program up from scratch after it was established by the Florida legislature in 1937, signed into law by Governor Fred P. Cone on June 9, 1937, and approved by the Social Security Board as meeting all Federal requirements on June 24, 1937. It began in a small office space above a drug store in downtown Tallahassee, Fl, with three employees. By August it had grown to 27 employees.

Newspapers around 1937 gave you a glimpse at the economy of the day. For instance, employment as a bartender was advertised at a salary of $7 per week. You could buy a six room home for $3,000, a new truck for $395, and a pot roast sold for 15 cents a pound. The initial unemployment weekly benefit amount was $15, which offered real hope for financial survival at the time.

These early years were completely devoted to getting the program up and running. Every state had to begin by locating and establishing employer’s who were considered liable for the payment of unemployment tax. Of course, this coming at a time when employers were struggling to make ends meet as a result of the Great Depression.

The original program covered workers who were employed by companies that had 8 employees on the payroll during 20 different weeks in a calendar year. It did not, however, provide unemployment coverage for large groups of workers. For instance, workers performing services in agriculture, non-profit organizations, domestic service and government work, were not covered for unemployment purposes and the employers were not liable for unemployment taxes. The Act also did not cover workers over the age of 65. The first tax and wage reports were collected from liable employers on a monthly basis, however, by 1938 states were moving to the quarterly report process that is still in use today.

Other major changes began to occur in 1939. The first being the removal of railroad workers from the Federal/State Unemployment Program due to the passage of the Railroad Unemployment Insurance Act which established a program solely for railroad workers. Around 1941 states were beginning to see a need to investigate unemployment fraud and employer audit programs began springing up around 1949. The original intent of the field audit program was to audit every employer once every four years. Never happened, and never will!

A lot of changes occurred from the 1950’s through the 1970’s. I’ll discuss them next week along with a history of FUTA tax rates.

Rett Hensley
TALX Strategic Consultant

In response to the severe recessionary economic conditions, several states either passed legislative changes in 2009 or had statutory provisions in place that resulted in significant state unemployment (SUI) tax increases for 2010. The extreme rise in unemployment taxes is expected to continue for the next several years as states work to replenish their trust funds. The Congressional Budget Office (CBO) estimates that taxes will increase from $38 billion in 2009 to $75 billion by 2013 and range from $78 - $84 billion through 2020.

The cost of high unemployment state taxes will be compounded by higher federal unemployment taxes as states struggle to repay their Title XII Loans. The states must repay the loans as well as interest on the monies borrowed.

To date, thirty two (32) state unemployment trust funds are broke and have borrowed over $32 billion from the federal government. The USDOL estimates that forty (40) states will become insolvent and borrow a total of $90 billion as a result of this recession.

There is tremendous pressure for the states to address the repayment of the federal loans as well as bringing solvency to their state trust funds, through higher unemployment taxes. On the flip side, there is unprecedented pressure from the employer community to reduce the unemployment tax burden.

As of this writing, both Florida and Massachusetts have enacted legislation to lessen or defer the significant tax increases their employers were experiencing in 2010. Hawaii, Indiana, Kansas and Maryland have similar legislation pending.

With the landscape continuously changing it will be critical for employers to stay abreast of the developments and factor them into their budget projections.

The attached Tax Intelligence Flyer was sent to our client base for the month of February. The flyer contains information on state legislative activity and the importance of rate forecasting.

Thanks!

TALX Tax Intelligence - ETS -February 2010 (PDF, 162kb)

Today is an exciting day for our clients.  President Obama signed into law the Hiring Incentives to Restore Employment (HIRE) Act.  The HIRE Act has many provisions which will focus on the hiring of unemployed workers.  The legislation will help spur job growth while allowing employers the opportunity to retain a portion (6.2%) of the Social Security tax.

Social Security Tax Exemption

The Social Security Tax Exemption is available for employees hired after February 3, 2010 and before January 1, 2011.  The tax exemption of 6.2% is based on the wages paid after March 18, 2010.  The employee must have been previously unemployed for at least 60 days and may not exceed the $106,800 Social Security wage base. A signed affidavit is required to document eligibility.

Tax Credit

The up to $1,000 income tax credit is available for each employee hired after February 3, 2010 and before January 1, 2011, that is employed for at least 52 consecutive weeks. Wages during the last 26 weeks must be at least 80 percent of wages paid for the first 26 weeks.  Companies who retain these new employees for a year may claim an additional credit of the lesser of $1,000 or 6.2 % of the wages paid to the employee in 2010.

Angela Lockman

By a 68-29 vote, the Senate gave final approval to the HIRE Act. The $17.6 billion job creation bill was passed on Wednesday, March 17, 2010. The bill had already passed the Senate once but the House tweaked it, requiring the second Senate vote before it could go to the White House. President Obama has showed his support for the legislation in the past and plans to sign it.

The legislation will:

• Exempt employers from Social Security payroll taxes on new hires who were unemployed. The act requires employers to screen and collect affidavits from eligible employees.
• Fund highway and transit programs through 2010.
• Extend a tax break for business that spend money on capital investments, such as equipment purchases.
• Expand the use of the Build America Bonds program, which helps states and municipalities fund capital construction projects.

The centerpiece of the legislation is a hiring tax credit.  It would exempt businesses that hire the unemployed from paying the 6.2 percent Social Security payroll tax through December. The tax savings for companies is a maximum of $6,621 per new employee.  Companies who retain these new employees for a year may claim an additional credit of the lesser of $1,000 or 6.2 percent of the wages paid to the employee in 2010.

"The beauty of this bill: It's simple, it's focused on private-sector job growth and it's paid-for," said Sen. Charles Schumer (D-N.Y.), a co-author of the measure. "It's modest, but ... it's almost a legislative dream."

Angela Lockman

I-9/E-Verify

By: Dave Fowler

The APA Capital Summit was held last week in Washington D.C. During my time in D.C. I had a chance to meet with various individuals responsible for E-Verify and enforcement of immigration laws including the Form I-9. Here is an update on what we all might expect in the coming months regarding E-Verify and information on why improvements can take longer that most of us would like or expect.

1. An E-Verify ICD (Interface Control Document) is a specification that covers the E-Verify web service computer-to-computer interface that E-Verify makes available primarily to Designated Agents (DAs) and to a lesser extent individual employers. The current ICD is version 20, but there will likely be others released within the next 12 months or so. When a new ICD is released DAs are typically given 6 months to implement the new interface. Here are some examples of what we may see.

• Support for ICDs older than version 19 will be discontinued.
• An ICD providing an expansion of the Photo Matching Tool that will include additional documents such as U.S. passport photos.
• An ICD that includes updates supporting the DHS plain language initiative to replace terms such as Tentative Nonconfirmation with something more meaningful to the user.

2. There are many stakeholders involved with E-Verify. Therefore, changes to the program, which, by the way, will remain a pilot program until Congress changes its status, must be reviewed and approved by a variety of groups within the government. For example, a partial list of these groups might include E-Verify, DHS management, DOJ OSC, SSA just to mention a few. Each of these groups have their own legal staffs and E-Verify is just one item on their worklist. So, you can see how it might be somewhat of a challenge getting all these groups and individuals on the same page.

3. Why are there so many different E-Verify manuals? I'll speculate that there are two main reasons for this.

• First, to avoid burdening a user with information that does not apply to them E-Verify has published manuals for each specific user audience.
• Second, government agencies need to comply with the paperwork reduction act to limit the amount of paper documents that are printed. While most E-Verify manuals are published online as PDFs and downloaded by the user, there are a number of users that request hardcopy manuals. So, E-Verify is required to cost justify the publication and printing of any new manuals. Since the publication of manuals doesn't generate revenue or reduce costs, it is much easier for E-Verify to get approval to publish smaller manuals. This might help explain why there is a Supplemental Guide for Federal contractors rather than a larger single manual for Federal contractors.

4. Guidance to simplify and clearly define what is acceptable as the Employment Date in E-Verify as well as what to enter as the Employment Date in Section 2 of the Form I-9. The same guidance must also apply to the Rehire Date entered in Section 3 of the Form I-9. There appears to be disagreement among the various stakeholders involved with the Form I-9 and E-Verify as to how to what the specific definition of these two fields can be and what it needs to be. Therefore, we should not anticipate that any guidance provided in the short-term will provide a simple, clear, and consistent definition of these dates. In my opinion, the guidance should be as simple as:

• The date (Employment and Rehire dates on the Form I-9 as well as what is provided to E-Verify) must be the date applicable section of the Form I-9 is signed or a previous date. The date must not be a date in the future. There is no requirement that the date match any date in the employer's systems.

Unfortunately, the guidance is more likely to be different for E-Verify and the Form I-9. In other words, E-Verify will not accept a future date, but a future date will be acceptable on the Form I-9. This will mean that if the date on the Form I-9 is a future date, the user will be instructed to enter the current date in E-Verify to verify the employee's work authorization. This approach will be confusing to users, limit or eliminate the E-Verify Monitoring and Compliance group from obtaining realistic statistics, it may serve to promote pre-screening, which is not allowed by E-Verify, and it is bad for the E-Verify brand to instuct users to enter information into E-Verify that is not on the Form I-9.

To sign off on a positive not, I will tell you that while there are challenges and enhancements that will make it easier to use and reduce the burden on employers, E-Verify is continuing to improve. So, hats off to the E-Verify team for that! However, we all need to keep the pressure on to push for needed enhancements.

That's it from the Capital.

HR Service Matters

By: Mike Smith

Having been close to sales and marketing organizations for over 30 years, I have observed the sometimes simple yet more often complex world of sales compensation plans.  And recently we have all been exposed to the difficulties of highly-leveraged bonus plans in the financial services arena.  Clearly all incentive plans have a goal to motivate employees to peak performance.

Recently, I reviewed a very interesting TED video by Daniel Pink. Pink’s talk covers some of the key elements of his newest book titled Drive.  The research highlighted is intriguing and his conclusions about a whole new operating model for business are very fascinating.  Rather than rely on traditional monetary (carrot) incentives which are external, Pink advocates an intrinsic motivational model that offers employees motivation through autonomy, mastery and purpose.  Below is the link to the complete video on TED.

http://www.ted.com/talks/lang/eng/dan_pink_on_motivation.html

In considering this new model, I believe that HR services can help facilitate the autonomy and purpose incentives.  Using even skimpy social networking capabilities, organizations can help promote autonomy by showing how employees are satisfying their urge to direct their own lives in the workplace.  Even team results can be promoted. 

HR services can also make it easier for employees see the bigger picture and bring into focus the essential purpose of the organization.  Everyone wants to know about the results that are bigger than any one individual.  This revelation helps to satisfy that longing we all have to see our work support the service of something greater than ourselves.

Aimee Cernik, a member of the TALX Unemployment Product Management team, is our guest blogger again today with some insight into how the insured unemployment rate is calculated. 

Last week I discussed what is involved with computing the national unemployment rate (NUR), an essential published monthly rate that helps determine the overall health of our economy.  Why is the NUR so important in projecting the health of the economy? Because a low rate of unemployment shows signs of economic prosperity, as well as the potential for inflation, and conversely a high rate of unemployment reveals signs of a recession or a depressed economy. 

Almost of equal importance is another unemployment number used as an economic health gauge is the insured unemployment rate (IUR), or the volume and length in which unemployment claims are filed.

What is insured unemployment? The unemployment insurance program was created to provide temporary financial assistance to those who became unemployed through no fault of their own (as determined by individual State law). This system was designed to hold significant funds during upswings in the economy, and to ultimately pay out in the downswings, and it is typically funded through a tax on employers.  It is important to note that each State has their own separate unemployment insurance programs, and each program may vary slightly, but all are designed within the Federal law guidelines.  

What does IUR mean to you? The IUR is often used as an indicator of labor market conditions across the Nation and within each State.  This rate is solely collected and calculated from the number of unemployment claims filed, across all states’ unemployment insurance programs, and is posted weekly by the Employment and Training Administration. 

There are two rate classifications for the IUR, initial claims and continued claims.  Those that file for unemployment for the very first time are counted as “initial”, which is treated as a notice that a person is starting a period of unemployment.  Since filing for unemployment is a weekly to biweekly process, those that continue to qualify and receive the benefits after the initial week are counted towards the insured unemployment figures as “continued”.

So why two rates?  The initial claims rate gives a snapshot of the emerging employment market.  A rise in the initial claim rate may signal a weakened economy, while the continued claims rate may expose how enduring the current state of the economy may last, as well as an overall lack of available employment.

Why is filed unemployment claims data not included in the national unemployment rate? Both the NUR and the IUR are important sources that help economists’ trend the economy as a whole and within States; however, the IUR exclusively focuses on filed unemployment claims, which results in the exclusion of several key groups to consider in the total unemployment rate such as:  self-employed workers, unpaid family workers, certain not-for-profit organizations, workers that have exhausted their unemployment benefits, and individuals that simply do not file for unemployment benefits.  Because of these limitations, data on IUR cannot be used towards total unemployment in the United States.  Although the IUR is not included in the NUR, it still lends itself quite readily in trending the state of the economy.

To learn more about the insured unemployment rate, please visit the Employment and Training Administration website at http://workforcesecurity.doleta.gov/unemploy/claims.asp.

Aimee Cernik

Aimee Cernik, a member of the TALX Unemployment Product Management team, is our guest blogger today with some insight into how the national unemployment rate is calculated. 

Did you ever wonder how one arrives at a number that is responsible for determining the overall health trajectory of the economy?  In fact, every month a division of the United States Department of Labor called the Bureau of Labor Statistics (BLS) releases the previous month’s information on the position of the national unemployment rate.  Now, one may assume the BLS bases the national unemployment rate on the total number of unemployment claims filed across all the states, but there are many more factors to consider in calculating the rate such as those who are unemployed and have not filed for unemployment, those that are not eligible for benefits, and those whose benefits have already been exhausted.   And, this information is not available by exclusively looking at filed unemployment claims.

So if you cannot get the complete picture from filed unemployment claims- how does the BLS evaluate and determine the national unemployment rate? Since it is nearly impossible to account for the entire employed and unemployed population, the BLS conducts a sample study titled “Current Population Study” (CPS).  This CPS consists of 60,000 households (approx. 110, 000 individuals) that will participate in a structured interview, which is conducted by 2,200 trained interviewers…every month.

60,000 may not seem like a comparative number to the entire national population, but this sample is statistically sound and large enough to result in a representative and reliable estimate of the true unemployed population.  To ensure accuracy and remove any bias and sampling error the BLS has built in measures to keep the information clean, fresh and up to date. According to the BLS, “25% of the households in the sample are changed on a monthly basis for the specific purpose that no household in the sample will be interviewed more than four times consecutively. After a household is rotated out of the survey, it is not interviewed again for 8 months”.  The BLS has stated that the monthly estimate of unemployment from the sample is within 290,000 of the total census, and the any error resulting from sampling is not significant enough to alter the total and true unemployment rate.  

So who is actually included in the survey?  The BLS is selective of who can participate in the CPS, and has set criteria as to who is considered part of the United States labor force, which includes anyone of 16 years or older who is employed, or is actively seeking employment.  Those who are NOT included in the survey population are those under the age of 16, those that choose not to enter the labor market or not actively seeking employment, and those serving in the armed forces.  

Since the CPS is collecting data that is the foundation for the national unemployment rate, the information gathered must be done correctly, administered the same way-every time, to obtain the facts. Participants are never asked directly if they are unemployed, but rather are asked a series of questions to help conclude their status within the labor force. Moreover, the interviewers solely gather the information, and never determine a respondent’s employment classification. Rather the employment classification is determined by inputing the information into a computer program, and in turn, the program classifies the respondents as unemployed, employed, or simply not in the labor force. 

Certain questions are asked of those not in the labor force to obtain additional information as described by the BSL as , “their desire for work, the reasons why they had not looked for work in the last 4 weeks, their prior job search, and their availability for work.” Finally the interviews and the information collected are then compared to the number of people in the labor force, thus resulting in the national unemployment rate percentage.

Who knew there was so much work involved to produce such an important economic benchmark! To learn more about the CPS or the information provided by the BLS, please visit their website at: http://www.bls.gov/cps/cps_htgm.htm#why

Aimee Cernik