There is a lot of discussion right now about unemployment. Who is getting it and doesn’t want to go back to work? Who is supposed to get it and still hasn’t gotten it? Who is back to work and never got the payments when they were off work?
Without a doubt, the unemployment payment program has been a mess. Most people are blaming their state, but in fairness, Congress came up with a law, passed it quickly and then passed the buck to all the individual states for the implementation.
And what an implementation it was! The terms changed from the way states had set up the program. There would no longer be a week waiting period. The unemployment payments would run for a longer time than normal. The federal government would kick in an additional payment from March 28, 2020 to July 25, 2020 of $600 per week. But the states had to set that up and, in most cases, foot the bill for the changes.
And, in probably the hardest to implement decision, Congress said that self-employed persons, gig workers and part time workers would qualify for unemployment payments when they’ve never received them before and no state had collected any unemployment premiums to cover the cost.
In CoronaTax: Free Money! New Opportunities!, the fine print to qualify for unemployment insurance according to the new CARES Act is discussed:
In an unprecedented move and for the first time ever, solopreneurs now can receive unemployment insurance. That’s all part of the Pandemic Unemployment Assistance in the CARES Act. They will be paid, at a minimum, the state’s lowest unemployment benefit + $600/week. Note that this is effective for all self-employed individuals (aka independent contractors, 1099 workers, gigworkers and solopreneurs) and people who have not worked enough to qualify for regular benefits. It’s the baseline for payment.
In order to qualify, self-employed independent contractors, gig workers and part-time employees will need to show that they have exhausted their unemployment benefits under current law and self-certify that they are unemployed, partially unemployed or unable to perform their work because:
- They have been diagnosed with COVID-19 or are experiencing symptoms of COVID-19 that require a medical diagnosis,
- A member of their household has been diagnosed with COVID-19,
- They are providing care for a family member or member of their household who has been diagnosed with COVID-19,
- A dependent member of their household for which they have primary caregiving responsibility is unable to attend school or another facility that has been closed as a direct result of the COVID-19 public health emergency and because of this closure and their care responsibilities they are unable to work,
- They are unable to work because of a quarantine imposed as a result of the COVID-19 public health emergency,
- They are unable to work because they have been advised to self-quarantine by a health care provider,
- They were scheduled to start a job but are unable to do so as a result of the COVID-19 public health emergency,
- They have become a “major support for a household” because the breadwinner in the household has died as a direct result of COVID-19,
- They had to leave their job as a direct result of COVID-19.
Besides meaning that there were changes to state law that had to be completed, often in emergency sessions, there were massive computer programming changes and, as we discovered, most of the states were operating on 50+ year old operating systems. They had to find someone who knew how to work these antiquated programs!
Two months into the unemployment situation since the shutdown started and we still have problems and questions, but there is one more looming that we have to talk about.
Where is the cash coming from to pay for all this?
The states are getting reimbursed by the federal government for the bonus $600/week and getting some money (probably not enough) to pay for the re-programming. But these kinds of unemployment are actually comprised of two parts.
There is an unemployment paid by the state. That’s the kind of unemployment that is more normal. You lose your job and you go apply for unemployment. If you’re doing it in regular times and not during a pandemic, the payments you receive come from the state unemployment trust fund.
The trust fund receives payments from businesses based on their employee unemployment experience rating and industry rate assessed by the state. On a monthly, quarterly or annual basis (depending on the state rules for the level of employment wages the business has), the business pays into the fund.
If the industry experiences a lot of lay-offs, the overall rate goes up for all businesses in that industry. If a business has more than normal lay-offs, the business rate will go up for that business.
The insurance trust is just that. It’s money held in trust like an insurance policy for employees in the state. There is also a federal unemployment payment that is made. It operates more like a tax, without a trust that has clear funding, payments and a balanced approach.
A business only has to pay state and federal unemployment insurance premium on employees. Independent contractors are not covered by the business unemployment insurance. Self-employed owners in a Sole Proprietorship don’t pay a premium. S Corporation employee/owners may or may not have to pay insurance premiums, based on the state law for their home state.
That’s why it was such a revolutionary idea for self-employed and independent contractors to be eligible for unemployment payments. They hadn’t paid in! State unemployment is set up like a regular insurance company. Businesses are assessed a premium and, as needed, insurance payments are paid out to laid off workers. If you hadn’t paid in, you didn’t get a payment out.
Congress just turned the whole system upside down.
Part of the new costs will be covered by the feds, but they also dictated that states needed to increase who they pay, when they pay and how much they pay.
Additional costs plus a whole lot more people claiming unemployment than ever before has led to a major drain on the state unemployment trust fund.
The federal govt has allowed states to borrow from the fed to cover the shortfalls. Ten states have started the process to borrow money. California was the first to actually borrow money, which they repaid mid-May. New York has borrowed over $50 million.
That helps with cash flow, but a loan has to be repaid. And that’s the big question for a lot of businesses.
Who is going to ultimately pay for all this, at the state level?
For now, let’s ignore the implications for the fed of running an increasingly unbalanced budget. How to fund an ongoing deficit will be the subject for another blog.
Let’s just talk about the states. The states have gone from an insurance trust with checks and balances to black hole of payments. Little to no money coming in due to the massive unemployment and more going out than the state has ever seen.
In normal times, the businesses would have its UI tax rate increased to cover the additional costs. This time, though, as businesses restart and the economy sputters to start, they can least afford the increased cost of more payroll taxes.
As of mid-May 2020, 26 stats and the District of Columbia have declared the Coronavirus-related layoffs will not be charged to the businesses by increasing their tax rate. These states are: AL, AZ, AR, CO, CT, GA, ID, IN, LA, ME, ML, MI, MN, MO, MT, NE, NH, NC, ND, OH, OK, PA, RI, SC, TX, UT, VA, WI and DC.
A few states have determined that the businesses WILL be charged: Arkansas, Maryland, Mississippi, Nevada, South Dakota and Washington.
It is important to note that the state with the highest unemployment rate, Nevada, is going to hold the businesses responsible for making up the shortfall as a tax on current employees. This could very well hamper their economic recovery and cause some businesses not to reopen at all.
In the case of states that have released businesses from increased taxes, most likely the shortfall will be made up by an overall increase in taxes. In other words, the businesses will still pay more but then again so will everyone else.
The ones who survive will be the businesses who are ready to survive the coming economic storm.
