A total of 17 states are slated to be FUTA credit reduction states for 2013 unless they pay off their outstanding federal unemployment insurance loans by November 10, 2013. This means that employers in the jurisdictions will not be able to claim the maximum amount of credit for state unemployment taxes when they file their federal unemployment tax returns for 2013 due at the end of January 2014.
A state that has not repaid money it borrowed from the federal government to pay unemployment benefits is a “credit reduction state.” If an employer pays wages that are subject to the unemployment tax laws of a credit reduction state, that employer must pay additional federal unemployment tax when filing its Form 940.
The FUTA tax rate is 6%, however, employers in states with unemployment taxes paid to their state as well can reduce the tax due to the United States Treasury by 5.4% bringing the total tax rate to just .6%. However, for employers in credit reduction states, the amount of FUTA tax needing to be paid increases .3% for each year their state has failed to pay back its loan. An employer in a state with a credit reduction of 0.3% computes its FUTA tax by reducing the 6.0% tax rate by a credit of only 5.1% (the standard 5.4% credit minus the 0.3% credit reduction) for an effective FUTA rate of 0.9% for the year. Any increased tax liability due to a credit reduction is considered incurred in the fourth quarter of the year and is due by January 31 of the following year.
Each year a state fails to pay back its loan to the federal government, the credit reduction increases .3% until it reaches a maximum 1.5% reduction.
Employers in the following states are facing reductions in their 2013 FUTA credits:
Arizona 0.6%
Arkansas 0.6%
California 0.9%
Connecticut 0.9%
Delaware 0.6%
Georgia 0.9%
Indiana 1.2%
Kentucky 0.9%
Missouri 0.9%
Nevada 0.9%
New Jersey 0.9%
New York 0.9%
North Carolina 0.9%
Ohio 0.9%
Rhode Island 0.9%
South Carolina 1.2%
Wisconsin 0.9%
While the credit reduction percentages may seem small, they can add up depending on the size of an employer’s workforce. The liability is determined by taking each employee’s earnings for the year (up to the maximum $7000 wage limit) and multiplying by the reduction rate.
Additional amounts per employee (if having earned at least $7000 in the year) are as follows:
- .3% – additional $21.00 for a total FUTA tax per employee of $63.00
- .6% – additional $42.00 for a total FUTA tax per employee of $84.00
- .9% – additional $63.00 for a total FUTA tax per employee of $105.00
- 1.2% – additional $84.00 for a total FUTA tax per employee of $126.00
If you are in one of these credit reduction states, be prepared to pay the additional per employee in January. This is especially important if you have numerous employees (or had a lot of turnover as it is based on all employees paid during the year) as the additional tax due can be a significant amount.
If you have any questions about this credit reduction, please feel free to give us a call at 310-534-5577 or e-mail us at [email protected]
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