Many Employers Will Owe Increased Unemployment Tax

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Executive Summary: Employers in 15 states (and the Virgin Islands) may not be eligible to claim the maximum amount of credit for state unemployment contributions on their 2014 federal unemployment tax (FUTA) return (Form 940) because their state has had an outstanding federal unemployment insurance (UI) loan for at least two years.

Employers generally pay FUTA tax at a rate of 6 percent on the first $7,000 of covered wages paid to each employee during a calendar year, regardless of when those wages were earned. That federal tax for a year is then offset by credits for amounts that the employer pays to a state unemployment insurance fund by January 31 of the following year. The "normal credit" is up to 5.4 percent of the first $7000 of covered wages, so the net FUTA tax rate for most employers is 0.6 percent (i.e., 6.0 percent - 5.4 percent), or a maximum of $42 per year per employee.

Under the Social Security Act, states are permitted to borrow funds from the federal government if the borrowing is necessary in order for the state to pay unemployment benefits. If a state defaults on repayment of such a loan, the amount of the credits that employers in the state are permitted to claim against their FUTA "normal credit" is reduced. The reduction in the credit (and the increase in the FUTA rate) is 0.3 percent beginning with January 1 of the second consecutive year in which the loan is not repaid by November 10. For each succeeding year in which there is a balance, the credit is further reduced by an additional 0.3 percent.

For the year 2014, 15 states (as well as the U.S. Virgin Islands) have had an outstanding federal UI loan for at least two years, and will therefore be "credit reduction states" unless they repay their outstanding federal UI loans by November 10, 2014. Those states, and the potential credit reduction faced by their employers, are:  

                                         2014 Potential

    State

Credit Reduction

Arkansas

       1.2%

California

       1.2%

Connecticut

       1.2%

Delaware

       0.9%

Georgia

       1.2%

Indiana

       1.5%

Kentucky

       1.2%

Missouri

       1.2%

New Jersey

       1.2%

New York

       1.2%

North Carolina

       1.2%

Ohio

       1.2%

Rhode Island

       1.2%

South Carolina

       1.5%

Virgin Islands

       1.2%

Wisconsin

       1.2%

The 2014 FUTA tax rates for employers in each of the listed states (other than Delaware) could turn out to be even higher than the rates resulting from the credit reductions noted above. Beginning with the third consecutive January 1 with an outstanding federal advance, if the advance is not repaid by November 10, employers in the state are subject to further credit reductions (and additions to the FUTA rate) that are determined based upon the particular state's unemployment insurance contribution and benefit  payment  experience.

Obviously, the dollar amounts involved are not going to be large, but employers should be aware of the variation in FUTA rates in their particular state(s). Since the actual "credit reduction states" will likely not be known until mid-November, additional tax due may have to be paid with the Forms 940 that will be filed in January, 2015.

Topics:  FUTA, Unemployment, Unemployment Insurance

Published In: Labor & Employment Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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