The states that must pay additional payroll taxes in the form of FUTA credit reductions have been announced by the Department of Labor. A state is a credit reduction state if it has taken loans from the federal government to meet its state unemployment benefits liabilities and has not repaid the loans within the allowable time frame.
The standard FUTA tax rate is 6.0% on the first $7,000 of subject wages, but employers may receive a credit of 5.4% when they file their Form 940 Employer’s Annual Federal Unemployment Tax Return, to result in a net FUTA tax rate of 0.6% (6.0% – 5.4% = 0.6%). If a state has outstanding loan balances on January 1 for two consecutive years and does not repay the full amount of its loans by November 10 of the second year, the FUTA credit rate for employers in that state will be reduced until the loan is repaid.
The reduction schedule is 0.3% for the first year the state is a credit reduction state, another 0.3% for the second year, and an additional 0.3% for each year thereafter that the state has not repaid its loan in full. These credit reductions are made from the regular credit of 5.4%. Employers in states with a further credit reduction will incur a tax rate of .6% plus the rate of the credit reduction.
The FUTA credit reduction is reported on the annual 940 tax return. Any increased FUTA tax liability due to a credit reduction is considered incurred in the fourth quarter and is due by January 31 of the following year.
For 2015, eight states and one jurisdiction faced a potential FUTA credit reduction, however, five of those states repaid their outstanding advances before November 10th thereby eliminating any FUTA credit reduction. Below are the locations with credit reductions, the rate of the reduction, and the total FUTA tax to be paid in 2015.
State Credit Reduction Total FUTA Rate
California 1.5% 2.1%
Connecticut 2.1% 2.7%
Ohio 1.5% 2.1%
Virgin Islands 1.5% 2.1%
If you have any questions regarding this additional tax, please reach out to my staff or me. And if you no longer want to handle your payroll, contact us to find out how easy it is to get started! Call us today at 310-534-5577.
