March 23, 2021 – Minnesota employers are accustomed to receiving their unemployment insurance (UI) tax rate notices in December notifying them of their unemployment tax rate for the coming year. This early notice generally allows employers time to notify their payroll company or update internal systems to calculate at the correct rate on the first payroll run of the New Year.
2021 was the exception as the state experienced a sudden rise in unemployment claims in 2020, delaying the notification until February – and the late release included an extra assessment compared to prior years. Here's what you need to know about the 4% assessment and whether or not an unemployment tax rate buydown could help you save in the long run.
According to Minnesota Unemployment Insurance (UIMN), each taxpaying employer's unemployment tax rate is determined by "dividing the total unemployment benefits paid to former employees by the total taxable wages paid to all their employees." With a spike in unemployment following the onset of the COVID-19 pandemic in 2020, the State of Minnesota exhausted the trust fund from which it pays unemployment benefits.
With benefits to pay, the state borrowed funds from the federal unemployment trust fund – and now, the State of Minnesota must pay interest on those borrowed funds. To recover the cost of that interest, the state has levied the Federal Loan Interest Assessment, an additional 4% tax on the amount of unemployment insurance tax due by Minnesota employers. The assessment will be due quarterly, when regular UI taxes are due.
While the assessment is equal for all taxpaying employers in Minnesota, its impact can loom larger for industries with high turnover rates. Businesses in the construction industry, typically burdened with high turnover and seasonal employment, are already assigned higher-than-average UI tax rates, and an additional 4% assessment is likely to make a noticeable impact on their payroll tax expense in 2021.
UIMN allows employers to reduce their unemployment insurance tax rate with a buydown payment from January through April of each year. A buydown (which cancels benefits paid charges on an employer's UIMN account) can help reduce the tax rate on unemployment insurance you'll owe each quarter in exchange for a sizable up-front payment.
It's worth noting that the effect of making a buydown payment will be realized over several years through a rate reduction. That also means you'd get the most benefit from a buydown if you can estimate payroll over the next few years and determine whether or not the long-term benefits outweigh the present cost.
For example, a business could make a $600,000 buydown payment on their UI tax rate today to reduce current tax and minimize the impact of the 4% assessment – but the decreased rate would only save them a fraction of that in the near term. While the "right" choice can feel like a moving target, your accounting professional can help by reviewing previous years' filings to help determine the best course of action for your business.
A degree of uncertainty remains regarding Minnesota UI tax rates. Minnesota currently has an outstanding federal loan balance, which means it could be on the list of states to receive a reduction in tax credits under the Federal Unemployment Tax Act in the future. This could signal additional payroll tax for Minnesota employers in 2022 and beyond. With the passage of the American Rescue Plan Act (ARPA) in March, state guidance may be forthcoming related to unemployment relief outlined in the Act.
Weighing the options for minimizing your tax liability can be a worthwhile exercise for your business's future. Do you have enough set aside for a buydown payment? Would it pay off within a timeframe that matters to your business? Your financial and accounting advisors can help you create a plan to address the increased tax liability in the coming months.