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Tax Alert: FUTA Credit Reduction States Released For 2014

California Employers to Pay Higher FUTA Tax Rates Retroactively
California employers will pay a higher FUTA tax rate in January when the 2014 Form 940 is filed. The FUTA tax “credit” employers typically receive is being reduced as a result of California’s outstanding loan balances with the Federal Unemployment Trust Fund.

FUTA (Federal Unemployment Tax Act) is a federal tax levied on employers covered by a state’s unemployment insurance (UI) program. Funds from the tax create the Federal Unemployment Trust Fund. When states don’t have enough funds to pay UI benefits for residents of their states, they take loans from the federal fund. A number of states, including California, did this during the recent economic downturn when the government expanded unemployment benefits.

The standard FUTA tax rate is 6.0% on the first $7,000 of wages subject to FUTA. Employers generally receive a credit of 5.4% when they file their Form 940, resulting in a net FUTA tax rate of 0.6%. However, if a state has outstanding federal loan balances on January 1 for two consecutive years, and does not repay the full amount by November 10 of the second year, the FUTA “credit” for employers in that state is reduced by 0.3% per year until the loan is repaid.

Several states issued bonds this year to repay the federal loan by November 10. California, however, did not repay the loan by the deadline, and thus employers in the state will be required to pay a higher FUTA rate retroactively to January 1 of this year. California is one of eight states that had an outstanding loan balance on January 1 for the years 2010 through 2014. As a result, the 5.4% credit is being reduced by 1.2%, resulting in a reduced credit of 4.2% and adjusted net FUTA tax rate of 1.8% (6.0 – 4.2 = 1.8%).

Since the states have until November to repay the outstanding federal loans, the increased FUTA tax liability due to the credit reduction is considered incurred in the fourth quarter and is due by January 31, 2015. The adjusted FUTA tax rate is retroactive to wages paid in 2014.

California Payroll will notify you of additional tax liabilities due once the 2014 Form 940 payroll tax return is calculated in January 2015.

Below is a list of States and their associated credit reductions. The additional amounts below are the maximum amount per employee for 2014. FUTA is calculated on the first $7000 of wages per year. To estimate the additional taxes, calculate the additional cost by the number of employees.

State Credit Reduction Additional Cost / Employee
California 1.2% $84.00
Connecticut 1.7% $119.00
Indiana 1.5% $105.00
Kentucky 1.2% $84.00
New York 1.2% $84.00
North Carolina 1.2% $84.00
Ohio 1.2% $84.00
Virgin Islands 1.2% $84.00

 

Federal Unemployment Tax Reform continues to be deferred. As the economy continues to strengthen, questions remain as to whether the issue will be part of the 2015 federal budget planning process. California Payroll continues to monitor for changes that may impact your business. We are prepared to keep you informed of legislative changes as they occur from the federal, and state and levels.

For more information, please contact your Client Manager or visit the IRS website at http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/FUTA-Credit-Reduction and http://workforcesecurity.doleta.gov/unemploy/finance.asp

 

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