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CCH® UNEMPLOYMENT INSURANCE — 6/19/14

More states face FUTA credit reductions for 2014

As things stand now, the annual spate of FUTA credit reductions will continue for 2014. In 2013, employers in 13 states were unable to claim the maximum credit for state unemployment taxes against their federal unemployment tax liability. According to new data from the Department of Labor, 15 states face credit reductions for 2014.

Credit reduction

The federal FUTA tax is levied on employers covered by a state's unemployment insurance (UI) program. The standard FUTA tax rate is 6.0% on the first $7,000 of wages subject to FUTA. However, employers generally receive a credit of 5.4% for state unemployment taxes when they file their Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, resulting in a net FUTA tax rate of 0.6% (6.0% - 5.4% = 0.6%). The maximum credit generally is available regardless of the actual state unemployment tax rate.

Some states take loans from the Federal Unemployment Trust Fund when they lack the funds to pay UI benefits for state residents. If a state has outstanding loan balances on January 1 for two consecutive years and does not repay the full amounts of its loans by November 10 of the second year, the FUTA credit rate for employers in that state will be reduced until the loan is repaid.

The reduction schedule is 0.3% for the first year the state is a credit reduction state and an additional 0.3% for each year thereafter that the state has not repaid its loans. Additional offset credit reductions may apply to a state beginning with the third and fifth taxable years if a loan balance is still outstanding and certain criteria are not met.

A reduction in the usual credit against the full FUTA tax rate increases an employer's tax liability on the Form 940. For example, an employer in a state with a credit reduction of 0.3% computes its FUTA tax by reducing the 6.0% FUTA tax rate by a FUTA credit of only 5.1% (the standard 5.4% credit minus the 0.3% reduction) for an effective FUTA tax rate of 0.9% for the year. Any increased FUTA 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.

Employers in the following states are facing possible reductions in their 2014 FUTA credits:

State 2014 Potential Credit Reduction
Arkansas 1.2%**
California 1.2%**
Connecticut 1.2%**
Delaware 1.2%**
Georgia 1.2%**
Indiana 1.5%**
Kentucky 1.2%**
Missouri 1.2%**
New Jersey 1.2%**
New York 1.2%**
North Carolina 1.2%**
Ohio 1.2%**
Rhode Island 1.2%**
South Carolina 1.5%**
Wisconsin 1.2%**

*Delaware is potentially subject to the additional credit reduction applicable to states following their third or fourth consecutive year with outstanding loans.

**These states are potentially subject to the additional credit reduction applicable to states following the fifth consecutive year with outstanding loans.

Bottom line

While the credit reductions may seem small, they can add up depending on the size of an employer's workforce. See below for a breakdown of what each level of credit reduction costs on a per worker basis:

Credit Reduction Cost Per $7,000 Worker
0.3% $21
0.6% $42
0.9% $63
1.2% $84

Wait and see

While the states listed above potentially face credit reductions for 2014, the final list of credit reduction states may be shorter. A state can avoid credit reductions by making sufficient payments on its outstanding loans. For example, South Carolina avoided credit reductions for 2011 through 2013 by making such payments and has indicated that it expects to continue to avoid credit reductions each year as it pays down its loans.