2014 FUTA Tax Rate Will Be Higher for Employers in Seven States

Author: Rena Pirsos, XpertHR Legal Editor

November 13, 2014

Seven states that took out loans from the federal government in order to keep their unemployment insurance (UI) trust funds solvent will lose the full Federal Unemployment Tax Act (FUTA) credit for 2014 because they did not pay off their loans by the November 10, 2014 deadline.

As a result, employers paying wages subject to UI tax in those states will owe a greater amount of the tax when they file their 2014 Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. Employers must deposit the additional FUTA taxes with their fourth quarter 2014 Form 940 deposit.

Following are the 2014 FUTA credit-reduction states, along with each state's credit-reduction amount and net FUTA rate:

FUTA Tax and Credit Reduction

Employers covered by a state's UI program pay FUTA tax at a standard rate of 6% on the first $7,000 of wages subject to FUTA. The funds collected from the FUTA tax go into the Federal Unemployment Trust Fund, administered by the US Department of Labor (DOL). In times of high unemployment, states can borrow money from the federal government to continue paying UI benefits to residents and to keep their own UI trust funds solvent.

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 for employers in that state is reduced until the loan is paid off. The credit reductions are made from the regular FUTA credit of 5.4%. For 2013, there were 13 credit-reduction states.

The reduction amount is 0.3% for the first year a state is a credit-reduction state, another 0.3% for the second year and an additional 0.3% for each subsequent year the state has not fully repaid its loan. Additional offset credit reductions may apply to a state beginning with the third and fifth tax years if there is still a loan balance and certain other criteria are not met. The DOL announces any credit-reduction states after the November 10 deadline each year.

Effect on Employers' Rates

The credit reduction has an effect on employers' UI tax rates. For example, an employer in a state with a 0.3% credit reduction must figure its FUTA tax by reducing the 6% FUTA tax rate by a FUTA credit of only 5.1% (the standard 5.4% credit minus the 0.3% credit reduction), for a FUTA tax rate of 0.9% for the year. Any resulting increase in FUTA liability is considered incurred in the fourth quarter and is due with the fourth quarter Form 940.

Employers operating in a credit-reduction state should plan ahead for the lower credit. Schedule A (Form 940), includes the credit-reduction states, the applicable credit-reduction amounts and an example of how to calculate the FUTA tax rate. The instructions for Form 940 also include information about the credit reduction and applicable tax deposit rules.

The 2014 Form 940, along with Schedule A, Multi-State Employer and Credit Reduction Information, is expected to be released soon by the IRS.