Resources
Share →

Thomson Reuters Tax & Accounting News

Featuring content from Checkpoint

Back to Thomson Reuters Tax & Accounting News

Employers in 13 states will face higher 2013 FUTA rates

November 15, 2013

The U.S. Department of Labor (DOL) has issued the final list of states for which employers will not be eligible to claim the maximum amount of state unemployment tax credits on their 2013 federal unemployment (FUTA) tax return because the 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 unemployment benefits. However, if a state defaults on its repayment of the loan, the normal credit available is reduced. This effectively increases the employer’s FUTA tax rate by 0.3% beginning with the second consecutive January 1 in which the loan isn’t repaid, then an additional 0.3% annually thereafter. (Code Sec. 3302(c)) Thus, the net FUTA tax rate paid by an employer in a state that has had an unpaid loan with the federal government for two consecutive years will be 0.3% higher than the net 0.6% rate used by employers in states without past due loans. The net FUTA tax rate continues to rise 0.3% for each additional year that the loans remain unpaid.

2013 credit reduction states. The following states and the Virgin Islands are included on the DOL list as credit reduction states in 2013, based on their failure to repay their outstanding federal UI loans by Nov. 10, 2013: Arkansas, California, Connecticut, Delaware, Georgia, Indiana, Kentucky, Missouri, New York, North Carolina, Ohio, Rhode Island, and Wisconsin.

… 0.6% credit reduction. The credit reduction for employers in Delaware will be 0.6% (a maximum of $42 more per employee, as compared to employers not in credit reduction states) because of Delaware’s failure to repay its outstanding federal loans for three consecutive years.

… 0.9% credit reduction. The credit reduction for employers in Arkansas, California, Connecticut, Georgia, Kentucky, Missouri, New York, North Carolina, Ohio, Rhode Island, and Wisconsin will be 0.9% (a maximum of $63 more per employee, as compared to employers not in credit reduction states) because of their state’s failure to repay its outstanding federal loans for four consecutive years.

… 1.2% credit reduction. The credit reduction for employers in Indiana will be 1.2% (a maximum of $84 more per employee, as compared to employers not in credit reduction states) because of Indiana’s failure to repay its outstanding federal loans for five consecutive years.

… Virgin Islands. The credit reduction for employers in the Virgin Islands will also be 1.2% (a maximum of $84 more per employee, as compared to employers not in credit reduction states) because of the Virgin Island’s failure to repay its outstanding federal UI loans for four consecutive years (a 0.9% increase), and an additional 0.3% increase due to a 0.3% Benefit Cost Ratio (BCR) add-on. The BCR add-on may apply (as it does for the Virgin Islands) beginning with the third or fourth consecutive year in which the federal loan has not been repaid and state unemployment insurance rates do not meet minimum federal levels. In addition, states may be subject to the BCR add-on beginning with the fifth year in which a federal loan balance still exists. The Virgin Islands was also subject to the BCR add-on in 2012.

Former credit reduction states. Arizona, Florida, Nevada, New Jersey, and Vermont recently repaid their outstanding federal UI loans. As a result, the net FUTA tax rate for employers in these states will be 0.6% (i.e., the rate for employers that are not in credit reduction states).

South Carolina. South Carolina has received approval from the DOL to avoid being a FUTA credit reduction state for the 2013 tax year.