Employers in 13 States Will Pay Higher FUTA Rate for 2013

Author: Rena Pirsos, XpertHR Legal Editor

November 14, 2013

Thirteen 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 2013 because they did not pay off their loans by the November 10, 2013 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 2013 federal Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, which is due by January 31, 2014. Employers must deposit the additional FUTA taxes by the Form 940 due date.

The following are the 2013 FUTA credit-reduction states, the credit-reduction amounts and the net FUTA rates:

FUTA Tax and Credit Reduction

Employers covered by a state's UI program pay FUTA tax at a standard rate of 6 percent 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 rate for employers in that state is reduced until the loan is paid off. For 2012, 18 states lost their FUTA credit reduction.

The reduction amount is 0.3 percent for the first year the state is a credit-reduction state, another 0.3 percent for the second year and an additional 0.3 percent for each year thereafter that 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

Employers in a credit-reduction state pay a higher FUTA tax rate when they file their annual Form 940. For example, an employer in a state with a 0.3 percent credit reduction must figure its FUTA tax by reducing the 6 percent FUTA tax rate by a FUTA credit of only 5.1 percent (the standard 5.4 percent credit minus the 0.3 percent credit reduction), for a FUTA tax rate of 0.9 percent for the year. Any resulting increase in FUTA liability is considered incurred in the fourth quarter and is due by January 31 of the following year.

Employers operating in a credit-reduction state should plan ahead for the lower credit. Schedule A (Form 940), Multi-State Employer and Credit Reduction Information, 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.

Note that the 2013 Form 940 and Schedule A have not yet been released by the Internal Revenue Service but should be available in the near future.