2021 unemployment compensation tax bill to go up for all employers

Instead of the lower unemployment tax bill originally projected for next year, all Alabama employers will have an additional 1.3% added to their current tax rate in 2020, thanks to the strain caused by job losses due to COVID-19.

Through no fault of their own, the 70% of Alabama employers who are at the lowest of the state’s 22 unemployment tax experience ratings will be billed three times more in 2021 than they currently pay. See example below provided by the Alabama Labor Department.

On top of their individual experience rating, all employers pay shared costs that cannot be charged to any particular employer, such as unemployment benefits paid to employees of businesses that have closed. Thanks to record low unemployment rates, those costs have been at 0% for the prior five years. In 2021, shared costs will be 1.3% for all employers, the Labor Department estimates.

Next year’s shared costs when added to the .65% experience rate that the majority of Alabama employers currently pay, means most will have a 1.95% unemployment insurance tax rate in 2021.

A business at the lowest experience rating with 20 employees and quarterly taxable payroll of $160,000 now pays about $1,040 in unemployment tax. At the 1.95% rate, they will pay $3,120, the Alabama Labor Department says.

Your association knows how hard you work to avoid paying more unemployment taxes,” said Alabama Retail Association President Rick Brown. “Your unemployment insurance tax bill is based on several factors; some you control and some you don’t. This is one you don’t. Fortunately, this unwanted bill won’t be past due until May 1st.”

The first quarterly tax payment will be due April 30 and delinquent after May 1 of next year. It could be as late as Jan. 31 before the state notifies employers of their exact 2021 rate. The rate you are billed in January will remain the same for all of 2021.

Ten years of positive economic growth went down the tubes in one month,” said Alabama Labor Secretary Fitzgerald Washington, speaking of the dramatic increase in Alabamians collecting unemployment at the height of the COVID-19-related shutdowns, slowdowns and layoffs from late March through April.

Alabama’s Unemployment Insurance Trust Fund went from $697 million on March 20 to $140 million as of Sept. 18, he said. The draw down in the fund, which ordinarily is totally underwritten by employer unemployment taxes, would have been greater had the governor and legislative leaders not allocated $300 million in federal CARES Act money to the account in September. Those funds spared Alabama businesses from a more than 500% tax hike in 2021.

Since 2010, following the Great Recession, Alabama employers have been paying UC taxes on Schedule D, the highest unemployment compensation tax rate schedule possible. Before the pandemic, “we had been trending toward Schedule C in 2021,” which means employers would have been paying less, Washington said. Instead, Alabama will stay in Schedule D.

>> Alabama Labor Dept. Schedule D Chart with Estimated 2021 Per Employee Rate

On Oct. 1, the Alabama Department of Labor reinstated temporarily waived employer costs associated with COVID-19-related claims. “As employment is rising, and nearly all businesses are open, we will no longer waive those costs,” Washington said at the time. Alabama went from a record low unemployment rate of 2.7% in December 2019 to the highest it had been in 37 years – 12.9% in April. The September rate had declined to 5.6% but was still higher than the 3.5% March rate.

Unemployment compensation taxes are individual to each business based on a formula that takes into account wages paid; the amount of unemployment among current and former employees; the average duration and cost of unemployment benefits paid to claimants over a three-year period; as well as the shared costs.

Waived costs exceeded $500 million. “While individual employers will not be held liable for these costs, they WILL go into the ‘shared costs’ portion of the tax rate computation and eventually will be distributed among all employers,” Washington said. Those costs will be used in calculating employers’ 2022 tax rates, department officials said.