Based on the latest data from the U.S. Treasury and the Department of Labor (DOL), employers across the country should brace themselves for higher than normal federal unemployment tax (FUTA) liabilities for 2013. A total of 17 states are slated to be FUTA credit reduction states for 2013 unless they pay off their outstanding federal unemployment insurance loans by November 10. This situation means that employers in those jurisdictions will not be able to claim the maximum amount of credit for state unemployment taxes when they file their federal unemployment tax returns for 2013 (due in 2014).
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 is generally available regardless of the actual state unemployment tax rate.
However, some states take loans from the Federal Unemployment Trust Fund if they lack the funds to pay UI benefits for residents of their states. If a state has outstanding loan balances on January 1 for two consecutive years, and does not repay the full amount 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% credit 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 reductions in their 2013 FUTA credits:
For most of the listed states, 2013 will be their third year as a credit reduction state. Therefore, employers in those states can expect a 0.9% reduction in their FUTA credit. However, employers in Arizona and Delaware face a lower 0.6% credit reduction; while Indiana and South Carolina employers could see a higher 1.2% reduction based on their failure to pay off their outstanding loans for five consecutive years.
While some states have announced steps to avoid credit reductions for 2013, others have conceded that they will remain credit reduction states. Both Arkansas and Wisconsin have alerted employers to expect credit reductions for 2013. On the other hand, South Carolina avoided credit reductions for 2012 by making sufficient payments on outstanding loans, and has indicated that it expects to continue to avoid credit reductions each year as it continues to pay them down. A state may obtain relief from credit reductions for a given year by making a specified amount of repayments on outstanding loans and meeting certain other requirements (Code Sec. 3302(g)(1)). However, that year still counts in determining whether the state will be subject to credit reductions in subsequent years.
The bottom line
While the credit reduction percentages may seem small, they can add up depending on the size of an employer's workforce. Here's a breakdown of what each level of credit reduction costs on a per worker basis:
Credit Reduction Cost per $7,000 (Worker)
(Actual and Potential Credit Reductions, DOL/ETA/OUI (1-3-2013); TreasuryDirect Title XII Advance Activities Schedule (8-5-2013).)