A total of 17 states are slated to be FUTA credit reduction states (states that have not repaid money borrowed from the federal government to pay unemployment benefits ) for 2013 unless they pay off their outstanding federal unemployment insurance loans by November 10, 2013. If an employer pays wages that are subject to the unemployment tax laws of a credit reduction state, that employer must pay additional federal unemployment tax when filing its Form 940.
Employers can usually reduce its FUTA tax by 5.4% when paying state unemployment taxes timely. However, each year a state fails to pay back its loan to the federal government, the credit reduction increases .3% until it reaches a maximum 1.5% reduction. Any increased tax liability due to a credit reduction is considered incurred in the fourth quarter of the year and is due by January 31 of the following year.
While the credit reduction percentages may seem small, they can add up depending on the size of an employer’s workforce. The liability is determined by taking each employee’s earnings for the year (up to the maximum $7000 wage limit) and multiplying by the reduction rate.
Additional amounts per employee (if having earned at least $7000 in the year) are as follows:
- .3% – additional $21.00 for a total FUTA tax per employee of $63.00
- .6% – additional $42.00 for a total FUTA tax per employee of $84.00
- .9% – additional $63.00 for a total FUTA tax per employee of $105.00
- 1.2% – additional $84.00 for a total FUTA tax per employee of $126.00
The Department of Labor will post the final list after November 10th which can be found at http://www.dol.gov/. If you are in one of these credit reduction states, be prepared to pay the additional tax per employee in January. This is especially important if you have numerous employees (or had a lot of turnover as it is based on all employees paid during the year) as the additional tax due can be a significant amount.