For 2016 three states and one jurisdiction faced a potential FUTA credit reduction. Two of those states repaid their outstanding advances before Nov. 10th thereby eliminating any FUTA credit reduction. The remaining one state and one jurisdiction had an outstanding balance of advances on January 1 in each of the years of 2010 through 2016, and did not repay all advances before November 10, 2016, these states face a 1.8% credit reduction.
Two states and one jurisdiction applied for a waiver of the fifth year (BCR) add-on and all them were found eligible for the waiver.
|
State(1) |
2016 Potential Credit Reduction Due to Outstanding Advance(2) |
2016 “2.7 add-on” (3) |
2016 “BCR add-on”(4) |
Applied For and
Received FUTA Credit Reduction Relief (5) |
Repaid Outstanding Title XII Advance before 11/10/2016 |
2016 Final Credit Reduction(6) |
| California | 1.8% | 0.0% | 0.0% | BCR Waiver | 1.8% | |
| Connecticut | 1.8% | 0.0% | 0.0% | X | 0.0% | |
| Ohio | 1.8% | 0.0% | 0.0% | BCR Waiver | X | 0.0% |
| Virgin Islands | 1.8% | 0.0% | 0.0% | BCR Waiver | 1.8% |
- These states have passed at least two consecutive January 1’s with an outstanding Federal advance and are therefore subject to a potential FUTA credit reduction. FUTA sections 3302(c)(2) and 3302(d)(3) provide that employers in states that have an outstanding balance of advances under Title XII of the Social Security Act at the beginning of January 1 of two or more consecutive years are subject to a reduction in credits otherwise available against the FUTA tax, if all advances are not repaid before November 10 of the taxable year. These credit reductions are made from the regular credit of 5.4%. So, while employers in states without a credit reduction will have a FUTA tax rate of 0.6% (on the first $7,000 of wages paid) for the year, employers in states with a credit reduction due to an outstanding balance of advances will incur a FUTA tax rate of 0.6% + the FUTA credit reduction.
- For each January 1 a state passes with an outstanding advance, following the second one, employers in the state are subject to an additional 0.3% reduction in their FUTA credit.
- Following their third consecutive January 1 with an outstanding advance states are subject to an additional FUTA credit reduction called the 2.7 Add-on. A description of this add-on is in FUTA 3302(c)(2)(B).
- These states are also potentially subject to the Benefit Cost Rate (BCR) additional credit reduction formula for having passed five consecutive January 1’s with an outstanding Federal advance, FUTA section 3302 (c) (2).
- A state may apply for relief from a reduction in its FUTA credit under section FUTA 3302. The deadline for application of relief for all types was July 1, 2016.
- The FUTA credit reduction for 2016 is calculated by adding the credit reduction due to having an outstanding advance plus the reduction from the 2.7% add-on or the BCR add-on- (for states not receiving the waiver), and applying this to states which have not repaid their outstand advances by Nov. 10, 2016.
Questions concerning credit reductions should be directed to Dyana Cornell at [email protected]. For more information on why credit reductions occur, see https://www.irs.gov/businesses/small-businesses-self-employed/futa-credit-reduction
