Number of States with FUTA Credit Reductions Reduced by Nearly Half

Number of States with FUTA Credit Reductions Reduced by Nearly Half

If you’re an employer in Arkansas, Delaware, Georgia, Missouri, New Jersey, South Carolina, Rhode Island or Wisconsin, good news! You will no longer see a Federal Unemployment Tax Act (FUTA) reduction on your tax bill. These states have either paid their unpaid FUTA balances or were granted a waiver for 2014. This is down from 13 states plus the US Virgin Islands who saw a credit reduction in 2013. (New Jersey had paid its loan balance before the 2013 deadline, but borrowed from the federal unemployment account again on January 1, 2014, so it had an outstanding balance that it paid before the 2014 deadline).

There are still seven states in addition to the US Virgin Islands who will pay a higher FUTA rate this year because of failure to repay their outstanding federal UI loans by the November 10, 2014 deadline.

FUTA was established to provide unemployment compensation to workers who have lost their jobs. As you are most likely already aware, employers are required to pay both a Federal and a state unemployment tax. However, with the recession and high numbers of unemployed individuals seeking unemployment compensation, many states turned to the Federal government to borrow additional funds to cover their unemployment expenses. States that did not pay back these outstanding loans by the November deadline saw a reduction in the FUTA tax credit.

The good news is that states are beginning to catch up and make their outstanding loan payments. Since employers essentially pay 100 percent of the unemployment tax, this is good news for them as well. State officials in Rhode Island announced that businesses in their state will save an estimated $95 million since the state’s unemployment trust fund has been restored to solvency. (Source: Charlotte Observer, “State repays federal unemployment insurance loans,” November 10, 2014). Businesses save money because they aren’t paying the interest accruing on the loan, and taxes are lower when the fund is fully solvent. 

The standard FUTA tax rate is 6.0% on the first $7,000 of wages subject to FUTA. Generally, employers receive a 5.4% credit when they file their From 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, to result in a net FUTA tax rate of 0.6%. This 5.4% credit is reduced if a state has outstanding loan balances on January 1 for two consecutive years. The credit is reduced 0.3% for the first year, 0.3% for the second year and an additional 0.3% for each year thereafter that the state has not paid its loan in full.

The following states will see a FUTA credit reduction for 2014 for failure to pay their outstanding loan balances:

 

State Credit Reduction 2014 Net FUTA Rate
California 1.2% 1.8%
Connecticut 1.7% 2.3%
Indiana 1.5% 2.1%
Kentucky 1.2% 1.8%
New York 1.2% 1.8%
North Carolina 1.2% 1.8%
Ohio 1.2% 1.8%
Virgin Islands 1.2% 1.8%

 

For a complete listing of the Final 2014 FUTA Credit Reductions that includes all states, visit the US Department of Labor website by clicking here. You can also learn more about FUTA, the credit reduction and reporting the credit reduction by visiting irs.gov. For Tricom clients who have specific FUTA tax questions, they may contact Mary Jo Heim at Tricom Accounting Department at 262-509-6214.

 

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