[author: Rena Pirsos, XpertHR Legal Editor]
Eighteen states that took out loans from the federal government in order to keep their unemployment insurance (UI) trust funds solvent will lose the full Federal Unemployment Tax Act (FUTA) credit for 2012 because they did not pay off their loans by the November 10, 2012 deadline. As a result, employers paying wages subject to UI tax in those states will owe a greater amount of the tax when they file their 2012 federal Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, which is due by January 31, 2013. Employers must deposit the additional FUTA taxes by the Form 940 due date.
The following are the 2012 FUTA credit reduction states and the credit reduction amounts:
Arizona, Delaware, Vermont - 0.3%.
Arkansas, California, Connecticut, Florida, Georgia, Kentucky, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Rhode Island, Wisconsin - 0.6%.
Indiana - 0.9%.
FUTA Tax and Credit Reduction
Employers covered by a state's UI program pay FUTA tax at a standard rate of six percent on the first $7,000 of wages subject to FUTA. The funds collected from the FUTA tax go into the Federal Unemployment Trust Fund, administered by the US Department of Labor (DOL). In times of high unemployment, states can borrow money from the federal government to continue paying UI benefits to residents and to keep their own UI trust funds solvent. 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 is reduced until the loan is paid off.
The reduction amount is 0.3 percent for the first year the state is a credit reduction state, another 0.3% for the second year, and an additional 0.3 percent for each year thereafter that the state has not fully repaid its loan. Additional offset credit reductions may apply to a state beginning with the third and fifth tax years if there is still a loan balance and certain other criteria are not met. The DOL announces any credit reduction states after the November 10 deadline each year.
Effect on Employers
Employers in a credit reduction state pay a higher FUTA tax rate when they file their annual Form 940. For example, an employer in a state with a 0.3 percent credit reduction must figure its FUTA tax by reducing the 6 percent FUTA tax rate by a FUTA credit of only 5.1 percent (the standard 5.4 percent credit minus the 0.3 percent credit reduction), for a FUTA tax rate of 0.9 percent for the year. Any resulting increase in FUTA liability is considered incurred in the fourth quarter and is due by January 31 of the following year.
Employers that think they may be in a credit reduction state should plan ahead for the lower credit. Schedule A (Form 940), Multi-State Employer and Credit Reduction Information, includes the credit reduction states, the applicable credit reduction amounts and an example of how to calculate the FUTA tax rate. The instructions for Form 940 also include information about the credit reduction and applicable tax deposit rules.
How to Report the Credit Reduction
On Schedule A, every state has a checkbox to be checked off by an employer that paid state UI taxes to that state, and a box for the FUTA taxable wages the employer paid in that state, which must be filled in if the state is a credit reduction state and the employer paid wages subject to UI tax in the state. Employers use schedule A if they have either:
Paid FUTA taxable wages and UI tax in more than one state; or
Paid FUTA taxable wages and UI tax in any credit reduction state, even if the employer is a single-state employer.
Employers that paid UI taxes to more than one state must check off all of those states on Schedule A, whether they are credit reduction states or not. Also, for credit reduction states, employer must enter the FUTA taxable wages paid in that state, even if the employer paid wages in only one state. However, FUTA taxable wages that are excluded from UI are not subject to credit reduction. More information is provided in the Instructions for Schedule A (Form 940).
DOL: Final 2012 FUTA Credit Reductions; IRS: FUTA Credit Reduction.
Payroll > Federal Unemployment Insurance Tax > State Loans Credit Reductions