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FUTA Tax Rate Will Increase in Some States

What's Up with FUTA?

The Federal Unemployment Tax Act (FUTA) tax rate may surge in several states starting January 1, 2016. This change may catch more than one employer off guard when filing their first Form 940 in 2016.


FUTA, along with state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs. Most employers pay both a federal and a state unemployment tax. For-profit employers must deposit and report FUTA tax using a rate of 6.0 percent. The tax applies to the first $7,000 of each employee's wages. However, employers receive a credit for the state unemployment tax amounts paid into state funds.

State wage bases may be different, and generally, employers can take a credit against their FUTA tax for amounts timely paid into state unemployment funds. The credit may be as much as 5.4 percent of the FUTA taxable wages; and if the employer is entitled to the maximum credit, that makes the FUTA rate 0.6 percent.

However, when state funds are depleted, some states are determined to be a credit reduction state. A state is a credit reduction state if it has taken loans from the federal government to meet its state unemployment benefits liabilities and not repaid the loans within the allowable time frame. A reduced state credit against the full FUTA tax rate means that the employers will owe more FUTA taxes.

In years when there are credit reduction states, employers must include liabilities owed for credit reduction with their fourth quarter deposit. Employers in states that have an outstanding balance of advances for two or more consecutive years, at the beginning of January 1, under the Social Security Act, are subject to a reduction in credits. These credits are otherwise available against the FUTA tax if all advances are repaid before November 10 of the taxable year.

In addition, states passing their fifth consecutive January 1 with an outstanding advance may be subject to an additional credit reduction.
Seven states and one jurisdiction were assessed FUTA credit reductions for 2014. Potential 2015 FUTA credit reductions states and their credit reduction (in brackets) include California [2.1%], Connecticut [2.8%], Indiana [2.4%], Kentucky [2.1%], New York [2.1%], North Carolina [.6%], Ohio [2.1%], South Carolina [.6%], and the Virgin Islands jurisdiction [2.1%].

The Department of Labor will announce in November 2015 whether additional 2015 FUTA tax rates will apply in certain states. Employers in credit reduction states will pay their increased 2015 FUTA taxes with their 2015 IRS Form 940 filed in January 2016.

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