Employers in Seventeen States May Face Higher FUTA Tax Rates

By Jason Bramwell
 
Because seventeen states and the Virgin Islands have had an outstanding federal unemployment insurance (UI) loan for at least two years, employers in those jurisdictions may not be able to claim the maximum amount of state unemployment tax credits on their 2013 Federal Unemployment Tax Act (FUTA) tax return, according to a recent analysis by Thomson Reuters Checkpoint.
 
Employers 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. This tax may be offset by credits of up to 5.4 percent (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, according to the analysis.
 
The net FUTA tax rate for most employers is 0.6 percent (i.e., 6.0 percent - 5.4 percent). 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 percent beginning with the second consecutive January 1 in which the loan isn't repaid, then an additional 0.3 percent annually thereafter.
 
The following seventeen states and the Virgin Islands will be credit-reduction states in 2013 unless they repay their outstanding federal UI loans by November 10 because, according to the US Department of Labor, they have had an outstanding federal UI loan for at least two years:
  • Arizona
  • Arkansas
  • California
  • Connecticut
  • Delaware
  • Georgia
  • Indiana
  • Kentucky
  • Missouri
  • Nevada
  • New Jersey
  • New York
  • North Carolina
  • Ohio
  • Rhode Island
  • South Carolina
  • Wisconsin
Arkansas and Wisconsin have already announced they will be credit-reduction states in 2013.
  
Employers in Arizona and Delaware face a possible 0.6 percent credit reduction on their 2013 FUTA tax return (maximum $42 increase per employee) because of their state's failure to repay its outstanding federal loans for three consecutive years.
 
Employers in the following thirteen states and the Virgin Islands face a possible 0.9 percent credit reduction on their 2013 FUTA tax return (maximum $63 increase per employee) because of their state's failure to repay its outstanding federal loans for four consecutive years:
  • Arkansas
  • California
  • Connecticut
  • Georgia
  • Kentucky
  • Missouri
  • Nevada
  • New Jersey
  • New York
  • North Carolina
  • Ohio
  • Rhode Island
  • Wisconsin
Employers in Indiana and South Carolina face a possible 1.2 percent credit reduction on their 2013 FUTA tax returns (maximum $84 increase per employee) because of their state's failure to repay its outstanding federal loans for five consecutive years.
 
However, South Carolina has made a $144 million early payment toward its outstanding federal UI loan and plans to make an additional $50 million payment in September, according to the analysis.  South Carolina took steps to avoid becoming a FUTA tax credit-reduction state in 2012 and expects to continue to avoid such a reduction in 2013 as it continues to repay its loan.
 
The 2013 FUTA tax rate for employers in Indiana, South Carolina, and the Virgin Islands could even be higher in 2013 than previously noted if these jurisdictions are subject to the benefit-cost ratio (BCR) add-on. The BCR add-on goes into effect beginning with the fifth taxable year of any succeeding consecutive January 1 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 and 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. Indiana and South Carolina have indicated that they will take steps to avoid being subject to the add-on.
 

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