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CCH® UNEMPLOYMENT INSURANCE — 12/18/14

Eight jurisdictions face FUTA credit reductions for 2014

The U.S. Department of Labor (DOL) recently announced the Federal Unemployment Tax Act (FUTA) credit reduction for eight jurisdictions for 2014. Employers in the affected jurisdictions must adjust their FUTA credit for the reduction when they file 2014 Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, the DOL explained.

In 2013, 14 states and the U.S. Virgin Islands faced credit reductions. The total number of jurisdictions facing credit reductions for 2014 has fallen to eight (seven states and the U.S. Virgin Islands).

Background

The FUTA tax rate is 6.0% on the first $7,000 of wages subject to FUTA. Employers may receive a FUTA credit of 5.4% for payment of state unemployment insurance tax. However, the credit may be reduced where states have received loans from the Federal Unemployment Trust Fund, have outstanding loan balances on January 1 for two consecutive years, and do not repay the full amount of the loans by November 10 of the second year.

The FUTA credit reduction rate 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 years if a loan balance is still outstanding and certain criteria are not met.

2014 reduction

For 2014, the DOL reported that California, Connecticut, Indiana, Kentucky, New York, North Carolina, Ohio, and the U.S. Virgin Islands face FUTA credit reductions. The final FUTA tax rates are 2.3% for Connecticut, 2.1% for Indiana, and 1.8% for the remaining jurisdictions (California, Kentucky, New York, North Carolina, Ohio, and the U.S. Virgin Islands) for 2014. Forty-three states face no FUTA credit reduction for 2014, according to the DOL.

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. A 0.3% reduction in the FUTA credit costs $21 per worker. A 0.6% reduction costs $42 per worker. A 0.9% reduction costs $63 per worker and a 1.2% reduction costs $84 per worker.