FUTA Tax Increases Come Home to Roost

 

Employers in 13 states will finally have to "pay the tax piper" on their 2013 federal unemployment (FUTA) tax returns. Under a special provision in the tax code, an employer isn't allowed to claim the maximum FUTA credit offset if the state it is located in has an outstanding federal unemployment insurance (UI) loan of at least two years. On November 12, 2013, in a long-awaited move, the Department of Labor (DOL) released the final list of states that will be affected for the 2013 tax year.

This change affecting FUTA credits is projected to increase FUTA costs of certain employers to nearly triple from an average of $42 per employee to $124 per employee. So this involves more than "spare change."

http://bizactions.com/img/Graphics/lores_US_states_pay_tax_piper_mb.jpgBackground Information

As a general rule, employers are required to pay FUTA tax at a rate of 6.0 percent on the first $7,000 of covered wages paid to each employee during a calendar year, regardless of when those wages were earned. However, the tax may be offset by credits of up to 5.4 percent against FUTA tax liability for amounts paid to a state UI fund by January 31 of the subsequent year. For practical purposes, therefore, the actual FUTA tax rate (in other words, the "net rate") for most employers is only 0.6 percent (6.0 percent minus 5.4 percent in credits).

But there's another complication to deal with. Under Title XII of the Social Security Act, states experiencing financial difficulty are allowed to borrow funds from the federal government in order to pay unemployment benefits. If a state subsequently defaults on its repayment of the loan, the normal credit available is reduced. The employer's FUTA tax rate is effectively increased by 0.3 percent beginning with the second consecutive January 1 in which the loan isn't repaid, followed by an additional 0.3 percent annually thereafter.

The bottom line is that the net FUTA tax rate paid by an employer in a state showing an unpaid loan with the federal government for two consecutive years will be 0.3 percent higher than the net 0.6 percent rate used by employers in states without past due loans. Furthermore, the FUTA tax rate continues to increase by 0.3 percent for each additional year that the loans remain unpaid.

More BCR Adds-On to Come

The Virgin Islands is the first to be subject to the BCR add-on. It was projected to trigger on Indiana and South Carolina for 2013, but both states requested waivers. In addition to the Virgin Islands, states that could trigger the BCR add-on in 2014 include:

Arkansas

New Jersey

California

New York

Connecticut

North Carolina

Georgia

Ohio

Kentucky

Rhode Island

Missouri

Wisconsin

Nevada

 

2013 Credit Reduction States

The DOL has clarified that certain states, as well as the Virgin Islands (see below), are included on the list of credit reduction states in 2013, due to their failure to repay their outstanding federal UI loans by November 10, 2013. The list includes Arkansas, California, Connecticut, Delaware, Georgia, Indiana, Kentucky, Missouri, New York, North Carolina, Ohio, Rhode Island, and Wisconsin (see chart). The following reflects the breakdown in the reductions.

0.6 percent credit reduction: The credit reduction for employers in Delaware will be 0.6 percent (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 percent 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 percent (a maximum of $63 more per employee, as compared to employers not in credit reduction states) because of their states' failure to repay outstanding federal loans for four consecutive years.

1.2 percent credit reduction: The credit reduction for employers in Indiana will be 1.2 percent (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: According to the DOL, the credit reduction for employers in the Virgin Islands will also be 1.2 percent (a maximum of $84 more per employee, as compared to employers not in credit reduction states), due to the failure to repay its outstanding federal UI loans for four consecutive years (a 0.9 percent increase), plus an additional 0.3 percent increase based on a 0.3 percent "Benefit Cost Ratio" (BCR) add-on.

The BCR add-on may apply to states, as it does for the Virgin Islands, beginning with the third or fourth consecutive year in which the federal loan hasn't been repaid and state unemployment insurance rates don't meet minimum federal levels (see box).

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 the 2012 tax year.

State

2012 FUTA
Credit Reduction

Net 2012 FUTA
Rate

2013 FUTA
Credit Reduction

Net 2013 FUTA
Rate

Arkansas

0.6%

1.2%

0.9%

1.5%

California

0.6%

1.2%

0.9%

1.5%

Connecticut

0.6%

1.2%

0.9%

1.5%

Delaware

0.3%

0.9%

0.6%

1.2%

Georgia

0.6%

1.2%

0.9%

1.5%

Indiana

0.9%

1.5%

1.2%

1.8%

Kentucky

0.6%

1.2%

0.9%

1.5%

Missouri

0.6%

1.2%

0.9%

1.5%

New York

0.6%

1.2%

0.9%

1.5%

North Carolina

0.6%

1.2%

0.9%

1.5%

Ohio

0.6%

1.2%

0.9%

1.5%

Rhode Island

0.6%

1.2%

0.9%

1.5%

Virgin Islands

0.6%

2.10%

1.2%

1.8%

Wisconsin

0.6%

1.2%

0.9%

1.5%

Source: http://www.employmenttax.com/blog/bid/154457/Latest-2013-FUTA-Credit-Reduction-States-Update-from-DOL

The news isn't dismal all around the country. A handful of 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 revert to 0.6 percent (in other words, the rate for employers that are not in credit reduction states). Also, South Carolina received approval from the DOL to avoid being a FUTA credit reduction state for the 2013 tax year.

More information is available upon request. Don't hesitate to contact your payroll provider or tax professional with questions about payment of FUTA taxes and other federal and state payroll obligations.