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Employers in eight states and the Virgin Islands could pay higher FUTA rates in 2015

The Department of Labor (DOL) says that employers in eight states (and the Virgin Islands) may not be eligible to claim the maximum amount of state unemployment tax credits on their 2015 federal unemployment (FUTA) tax return. That’s 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. For each succeeding year in which there is a balance, the credit is further reduced by an additional 0.3%.

Potential 2015 FUTA credit reduction states. According to the DOL, the following states (and the Virgin Islands) will be credit reduction states in 2015, unless they repay their outstanding federal UI loans by Nov. 10, 2015, because they have had an outstanding federal UI loan for over two years: California, Connecticut, Indiana, Kentucky, New York, North Carolina, Ohio, and South Carolina.

Benefit Cost Ratio (BCR) add-on. The 2015 FUTA tax rate for employers in all of the above states, except New York, could be even higher if these jurisdictions are subject to a rule called the Benefit Cost Ratio (BCR) add-on. This additional credit reduction goes into effect beginning with the fifth taxable year of any succeeding consecutive January 1 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 DOL has estimated the potential 2015 BCR add-on for the above jurisdictions based on extrapolated wages and tax contributions for the third and fourth quarter of 2014 (see below). States can apply to receive a waiver from the BCR add-on.

Total potential 2015 credit reductions. Here is the potential total federal unemployment tax rate increase for employers in the states above, and the Virgin Islands, after consideration of both credit reductions and the BCR add-on:

  • California, 2.9%, due to a 1.5% credit reduction because of its failure to repay its outstanding federal loans for six consecutive years, and a 1.4% BCR add-on. California applied for, and received, a waiver from the BCR add-on for the 2014 tax year.
  • Connecticut, 2.1%, due to a 1.5% credit reduction because of its failure to repay its outstanding federal loans for six consecutive years, and a 0.6% BCR add-on.
  • Indiana, 2.7%, due to a 1.8% credit reduction because of its failure to repay its outstanding federal loans for seven consecutive years, and a 0.9% BCR add-on. The Jan. 29, 2015, version of the Indiana Unemployment Insurance Employer Handbook says that Indiana will again be a FUTA credit reduction state in the 2015 tax year (payable in January 2016) due to its outstanding federal UI loans. Indiana applied for, and received, a waiver from the BCR add-on for the 2014 tax year.
  • Kentucky, 2.2%, due to a 1.5% credit reduction because of its failure to repay its outstanding federal loans for six consecutive years, and a 0.7% BCR add-on.
  • New York, 1.5% because of its failure to repay its outstanding federal loans for six consecutive years.
  • North Carolina, 2.1%, due to a 1.5% credit reduction because of its failure to repay its outstanding federal loans for six consecutive years, and a 0.6% BCR add-on. North Carolina applied for, and received, a waiver from the BCR add-on for the 2014 tax year.
  • Ohio, 2.7%, due to a 1.5% credit reduction because of its failure to repay its outstanding federal loans for six consecutive years, and a 1.2% BCR add-on. Ohio applied for, and received, a waiver from the BCR add-on for the 2014 tax year.
  • South Carolina, 2.1%, due to a 1.8% credit reduction because of its failure to repay its outstanding federal loans for seven consecutive years, and a 0.3% BCR add-on. South Carolina expects to repay its outstanding federal unemployment trust fund loan in full this summer.
  • Virgin Islands, 3.0%, due to a 1.5% credit reduction because of its failure to repay its outstanding federal loans for six consecutive years, and a 1.5% BCR add-on. The Virgin Islands applied for, and received, a waiver from the BCR add-on for the 2014 tax year.

References: For imposition of FUTA, see FTC 2d/FIN ¶  H-4726; United States Tax Reporter ¶  33,014; TaxDesk ¶  550,501;  TG ¶  9801.

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