Will Your Federal Unemployment Tax go up in 2022?

Will Your Federal Unemployment Tax go up in 2022?

After all the chaos and upheaval of the last year, something is looking a bit familiar – and it’s not welcome news for many business owners.

Many states appear to be headed down the same path as they did in 2011 to 2017 after the great recession of 2007 and 2008. This is when the majority of states received federal loans to shore up their trust reserves. As of June 7, 2021, eighteen states’ unemployment insurance trust funds had outstanding loans from the Federal Unemployment Account totaling $52.66 billion.

With high jobless rates since March of 2020 due to the COVID-19 pandemic, many states have suffered record-high unemployment rates rendering the state’s unemployment trust fund insolvent.

Let’s review the Federal Unemployment Tax Act (FUTA) tax rate and how it works to ensure we all understand how this could possibly impact your business.

The FUTA tax rate is currently 6.0% on the first $7,000 in wages paid per employee each year. However, employers in general receive a 5.4% FUTA tax credit reduction when they file their FORM 940 (Employer’s Annual FUTA Tax Return), resulting in a net FUTA tax rate of 0.6%.

If a state has an outstanding federal unemployment loan balance on January 1 for two consecutive years, and does not repay the full amount of its loans by November 10th of the second year, the FUTA credit rate for employers in that state is reduced until the loan is repaid. This net effect results in a higher rate the employer will pay. The reduction schedule is 0.3% for the first year, 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.

Employers in the following states and jurisdictions are at risk of increasing FUTA taxes as early as 2022:

California Minnesota
Colorado Nevada
Connecticut New Jersey
Hawaii New Mexico
Illinois New York
Kentucky Ohio
Louisiana Pennsylvania
Maryland Texas
Massachusetts West Virginia

 

 

 

 

 

 

 

 

 

 

Since these states had an outstanding balance on January 1, 2021, employers with employment in these states may be subject to an increase in Federal Unemployment Tax for 2022 if the loan amount remains outstanding as of January 1, 2022 and is not repaid in full by November 10, 2022.

The IRS outlines the impact this has to business owners in these states: “The result of being an employer in a credit reduction state is a higher tax due on the Form 940.

For example, an employer in a state with a credit reduction of 0.3% would compute its FUTA tax by reducing the 6.0% FUTA tax rate by a FUTA credit of only 5.1% (the standard 5.4% credit minus the 0.3% credit reduction) for an effective FUTA tax rate of 0.9% for the year.

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.

Employers who think they may be in a credit reduction state should plan accordingly for the lower credit.”

We encourage business owners to continuously monitor this situation where you have employment in the state and the state has an outstanding federal unemployment loan balance. If you have any questions, please feel free to reach out to your TRICOM accounting representative.

Sources:
https://www.irs.gov/businesses/small-businesses-self-employed/futa-credit-reduction
https://tax.thomsonreuters.com/blog/2022-outlook-for-potential-futa-credit-reduction-states/
https://www.irs.gov/businesses/small-businesses-self-employed/futa-credit-reduction
https://taxnews.ey.com/news/2020-1265-employers-risk-futa-credit-reductions-and-higher-state-ui-taxes-as-covid-19-claims-continue-to-climb
https://thomas-and-company.com/news/budgeting-for-futa-federal-unemployment-tax-for-2021-and-beyond/

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