FUTA Credit Reductions
What is FUTA?
FUTA is the Federal Unemployment Tax, which provides for payments of unemployment compensation to workers who have lost their jobs. This tax is paid by employers and is not withheld from employees’ wages. The current FUTA tax rate of 6.0% is applied to the federal wage base, the first $7,000 paid to each employee during the year. Employers generally receive a 5.4% credit for state unemployment taxes when they file their Form 940, which results in a 0.6% net FUTA tax rate, or $42.00 per employee.
The Department of Labor (DOL) releases a list of states each year subject to a reduction in FUTA credit. A state that has not repaid the money it borrowed from the federal government to pay their unemployment benefits constitutes a credit reduction state. These states are subject to a reduction in the credit for unemployment taxes that can be applied to the overall federal unemployment taxes credit on the IRS Form 940. This additional FUTA tax, resulting from the credit reduction, escalates annually until the loans are repaid. The offset generally applies to all employers, except government entities, non-profit organizations, and Native American tribes. The FUTA tax liability is not due or reportable until January 31, 2016, the filing date for the 2015 Form 940.
2016 FUTA Credit Reduction States and Amounts
- California – 1.8% FUTA credit reduction.
- U.S. Virgin Islands – 1.8% FUTA credit reduction.
For 2016, three states and one jurisdiction faced a potential FUTA credit reduction. Connecticut and Ohio repaid their outstanding advances before Nov. 10th, thereby eliminating any FUTA credit reduction. California and the U.S. Virgin Islands had an outstanding balance of advances on January 1 in each of the years of 2010 through 2016, and did not repay all advances before November 10, 2016; these states face a 1.8% credit reduction.
California, Ohio, and the U.S. Virgin Islands applied for a waiver of the fifth year (BCR) add-on and all them were found eligible for the waiver.
How This Affects Your Company
If your company is not exempt then you may have to pay more FUTA tax on wages paid that are subject to the unemployment tax laws. For example, a 10 employee company subject to a 0.9% reduction, in which each employee makes a minimum of $7,000, will pay an additional $630.00 or $63.00 per employee.
How APS Can Help
APS’s payroll tax compliance services handles all paperwork, filings, and payments for FUTA, keeping you in compliance:
- State-level system update of credit reduction rates
- Notification whether your state has a FUTA credit reduction and what amount is due the first week of January
- Preparation and filing of Form 940