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Employers in 15 states may face higher FUTA rates in 2014

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

Background. Employers pay FUTA tax at a rate of 6.0% on the first $7,000 of covered wages paid to each employee during a calendar year, regardless of when those wages were earned. This tax may be offset by credits of up to 5.4% (known as the “normal credit” and “additional credit”) against their FUTA tax liability for amounts paid to a state UI fund by January 31 of the subsequent year. The net FUTA tax rate for most employers is 0.6% (i.e., 6.0% − 5.4%).

Under Title XII of the Social Security Act, states with financial difficulties can borrow funds from the federal government to pay UI benefits. If a state defaults on its repayment of the loan, the amount of state UI tax credits that employers in the state may claim is reduced. Employers in credit reduction states pay FUTA tax at a 0.3% rate higher than other employers, beginning with the second consecutive January 1 in which the loan is not repaid by November 10 of that year. (Code Sec. 3302(c)) For each succeeding year in which there is a balance, the credit is further reduced by an additional 0.3%.

Under Code Sec. 3302(g), provided that certain requirements are met, a state with an outstanding loan under Title XII may repay any advances using its unemployment trust fund account in lieu of having the credit reduction rules apply to its employers.

Potential 2014 FUTA credit reduction states. The following states (and the Virgin Islands) will be credit reduction states in 2014, unless they repay their outstanding federal UI loans by Nov. 10, 2014, because, according to the Department of Labor, they have had an outstanding federal UI loan for at least two years: Arkansas, California, Connecticut, Delaware, Georgia, Indiana, Kentucky, Missouri, New Jersey, New York, North Carolina, Ohio, Rhode Island, South Carolina, and Wisconsin.

0.9% credit reduction. Delaware employers face a possible 0.9% credit reduction on their 2014 FUTA tax return (maximum $63 increase per employee) because of their state’s failure to repay its outstanding federal loans for four consecutive years.

1.2% credit reduction. Employers in Arkansas, California, Connecticut, Georgia, Kentucky, Missouri, New York, North Carolina, Ohio, Rhode Island, Wisconsin, and the Virgin Islands face a possible 1.2% credit reduction on their 2014 FUTA tax return (maximum $84 increase per employee) because of their state’s failure to repay its outstanding federal loans for five consecutive years.

1.5% credit reduction. Employers in Indiana and South Carolina face a possible 1.5% credit reduction on their 2014 FUTA tax returns (maximum $105 increase per employee) because of their state’s failure to repay its outstanding federal loans for five consecutive years. However, South Carolina took steps to avoid becoming a FUTA tax credit reduction state in 2013 by repaying some of its federal loan and expects to continue to avoid such a reduction in 2014 as it continues to repay its loan.

Even higher FUTA credit reduction rates. The 2014 FUTA tax rate for employers in Arkansas, California, Connecticut, Georgia, Indiana, Kentucky, Missouri, New Jersey, New York, North Carolina, Ohio, Rhode Island, South Carolina, Wisconsin and the Virgin Islands could even be higher in 2014 than noted above if these jurisdictions are subject to the Benefit Cost Ratio (BCR) add-on. The BCR add-on goes into effect beginning with the fifth tax year of any succeeding consecutive January 1st that there is a balance due on the federal UI loan. The tax is a complicated calculation that compares the average unemployment benefits that have been paid to the tax effort in the state. If the tax effort has not met a certain level, the BCR add-on is imposed. The Virgin Islands was subject to the BCR add-on in 2012 and 2013.

Arizona. Arizona repaid its outstanding federal UI loan in 2013. As a result, the net FUTA tax rate for Arizona employers will be 0.6% (i.e., the rate for employers that are not in credit reduction states) in 2014. Arizona recently took out another federal UI loan, but a spokesperson for the Arizona Department of Employment Security has told RIA that the State expects to repay the federal UI loan by May 5, 2014.

Arkansas. The Arkansas Department of Workforce Services (DWS) has announced that, barring any further economic downturn, it does not expect to be a credit reduction state in the 2014 tax year. [DWS website, Unemployment Insurance Tax Information ]

Click here to view the 2014 the Arkansas DWS announcement.

New Jersey. New Jersey repaid its federal UI loans by Nov. 10, 2013, to avoid being a credit reduction state in 2013, but took out another loan in December 2013, which means that it could be a credit reduction state again in 2014 if it does not repay the loan by Nov. 10, 2014.

North Carolina. According to published reports, North Carolina expects to repay its federal UI loans by Nov. 10, 2015.

Pennsylvania. Pennsylvania took out federal UI loans in January 2014 and could be a credit reduction state in the 2016 tax year if the loans aren’t repaid.

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