Industry Case Study

COVID-19 Impacts on FICA and FUTA Rates

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The FICA taxable wage base is expected to decline by 15 percent in 2020 and 2021. The FUTA tax rate payable by employers is projected to increase by 0.3 percent in 2022.

PROJECTED CHANGES TO THE FICA RATE

Changes to the FICA rate are greatly limited in scope. The FICA rate can only be adjusted by the Social Security Administration (SSA), the administering agency, or by an act of Congress through two effective mechanisms: the taxable wage base and the tax rate.

1. ADMINISTRATIVE ACTIONS

  • The Social Security Administration is only allowed by law to increase the taxable wage base. An increase in the taxable wage base is not entirely at the discretion of the SSA. The taxable wage base is subject to annual review and is constrained to an equivalent increase in the national average wage index (NAWI). The formula for determining the Federal Insurance Contributions Act (FICA) tax is set by law.
  • In October 2020, the SSA announced an increase in the taxable wage base for FICA and other social security taxes for 2021. The taxable wage base was increased from $137,000 to $142,800 for the next fiscal year, 2021.
  • The importance of hinging the growth in taxable wage base to an equivalent increase in the national average wage index indicates that the taxable wage base will continue to increase as long as the national average wage index continues to rise.
  • Since the increase or decrease in the FICA taxable wage base depends on the national average wage index, future estimations of this index are crucial in predicting any future increase or decrease in the nearest future.
  • The COVID-19 pandemic is expected to produce a sharp decline in the national average wage index, and consequently, the FICA taxable wage base in the next few years.
  • Officials of the SSA testified before the US House of Representatives in July 2020. According to their official statements, the national average wage index is expected to fall by an estimated 15 percent in 2020 as a result of COVID-19. This reduction in payroll earnings will greatly erode the taxable base from which FICA tax is derived by about $150 billion. The SSA also expects taxable payroll to decrease by 15 percent in 2021, with the economy making a full recovery by 2022.

2. CONGRESSIONAL ACTIONS

  • In September 2020, the Congressional Budget Office (CBO) published a study on the stability of the Social Security Trust Fund (SSTF). The study, which did not include the impact of COVID-19, projected that the Fund will run out of surplus allocation by 2031.
  • The Congressional Research Service (CRS) recently published an opinion report on feasible approaches to addressing the SSTF’s long-term funding challenges. According to the report, rising inequality in the United States has had adverse effects on social security taxes.
  • The service proposed that significantly raising the taxable wage base or eliminating the cap on taxable wages will effectively reduce long-term deficits in the Social Security Trust Fund. Both approaches will significantly increase the FICA tax rate, as the FICA tax represents about 89 percent of earnings for the Social Security Trust Fund. None of the approaches proposed by the CSR has been adopted by Congress.
  • In January 2019, Congress introduced a bill that will effectively increase the social security tax rate, a component of the FICA tax, from 6.2% to 7.4%. The bill, known as the Social Security 2100 Act, also plans to extend the taxable wage base from its current level to $400,000. The bill is still being discussed in the House.

PROJECTED CHANGES TO THE FUTA RATE

A number of private and public organizations have attempted to quantify future changes in the FUTA rate. Below are the expected changes in the rate as determined by reputable bodies.

1. Equifax

  • The credit rating agency expects the majority of employers to only notice an increase in their FUTA charges by 2022, especially in states that have outstanding federal unemployment insurance (UI) loan balances.
  • As of October 2020, a total of 22 states have drawn credit from the US Treasury to augment their unemployment funds. According to Equifax, those states will witness a gradual increase of 0.3% in their FUTA rates if the advances from the US Treasury remain outstanding by November 2021. The rates will also continue to increase by 0.3% if the loans remain unpaid in subsequent years.

2. Ernst & Young (EY)

  • The tax consulting firm expects FUTA rates to increase in the coming years. The firm predicts the increase will span several years, as observable in the last great recession of 2007. For example, the state of California saw its FUTA rates rise for four consecutive years and spent nine years repaying its federal UI loans before it witnessed any drop in its FUTA rates.

FUTA Credit Reduction

  • EY expects states that are unable to repay their unemployment insurance loans before 2022 to notice a steady increase in their FUTA rates. The rates will also increase by 0.3% for every year the loans remain unpaid.

3. RSM

  • The firm, a tax consulting agency, expects employers to begin to notice increased FUTA rates by 2022. The rationale for the increase of the FUTA rate is similar to those presented by Equifax and EY. States that are unable to clear their backlog of federal loans by November 2021 will automatically trigger the FUTA credit reduction clause.
  • The FUTA credit reduction clause mandates employers in states with outstanding UI balances with the US Treasury to make contributions toward settling the loan when such states fail to clear the loans after two cycles.

4. The Michigan Chamber of Commerce (& Others)

  • The Michigan Chamber, along with 50 other organizations, published a report in August 2020, where they shared their views on future projections for the FUTA rate.
  • According to the report, the group expects FUTA rates payable by employers to start rising by 2022 and keep increasing through 2023 and 2024. The rationale for the projected increase is also based on the commencement of the FUTA credit reduction clause embedded in the Federal Unemployment Tax Act.
  • The Chamber wrote to Congress to extend federal UI loans waiver through 2021 and delay the commencement of FUTA credit reduction for affected states by a year.
GLENN TREVOR
Glenn is the Lead Operations Research Analyst at Simple Manifestation with experience in research, statistical data analysis and interview techniques. A holder of degree in Economics. A true specialist in quantitative and qualitative research.

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