Because certain states have had an outstanding federal unemployment insurance (UI) loan for at least two years, employers in these 17 states (and the Virgin Islands) may not be eligible to claim the maximum amount of state unemployment tax credits on their 2013 federal unemployment (FUTA) tax return,

Employers pay FUTA  tax at a rate of 6.0% on the first $7,000 of covered wages paid to each employee during a calendar year, regardless of when those wages were earned. This tax may be offset by credits of up to 5.4%  against their FUTA tax liability for amounts paid to a state UI fund by January 31 of the subsequent year. Thus the net FUTA tax rate for most employers is 0.6% (6.0% − 5.4%).

Under Title XII of the Social Security Act, states with financial difficulties can borrow funds from the federal government to pay unemployment benefits. Many states borrowed federal funds to shore up UI trust funds after the 2008 financial collapse. If a state defaults on its repayment of the loan, the normal credit available is reduced. This effectively increases the employer’s FUTA tax rate by 0.3% beginning with the second consecutive January 1 in which the loan isn’t repaid, with an additional 0.3% added annually thereafter. Thus, the net FUTA tax rate paid by an employer in a state that has had an unpaid loan with the federal government for two consecutive years will be 0.3% higher than the net 0.6% rate used by employers in states without past due loans. The net FUTA tax rate continues to rise 0.3% for each additional year that the loans remain unpaid.

The following states and the Virgin Islands will be credit reduction states in 2013, unless they repay their outstanding federal UI loans by Nov. 10, 2013, because, according to the Department of Labor, they have had an outstanding federal UI loan for at least two years: Arizona, Arkansas, California, Connecticut, Delaware, Georgia, Indiana, Kentucky, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Rhode Island, South Carolina, the Virgin Islands, and Wisconsin. Arkansas and Wisconsin have already officially announced that they will be credit reduction states in 2013.

More specifically:

  • Employers in Arizona and Delaware face a possible 0.6% credit reduction on their 2013 FUTA tax return (maximum $42 increase per employee) because of their state’s failure to repay its outstanding federal loans for three consecutive years.
  • Employers in Arkansas, California, Connecticut, Georgia, Kentucky, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Rhode Island, the Virgin Islands, and Wisconsin face a possible 0.9% credit reduction on their 2013 FUTA tax return (maximum $63 increase per employee) because of their state’s failure to repay its outstanding federal loans for four consecutive years.
  • Employers in Indiana and South Carolina face a possible 1.2% credit reduction on their 2013 FUTA tax returns (maximum $84 increase per employee) because of their state’s failure to repay its outstanding federal loans for five consecutive years. However, South Carolina has made a $144 million early payment toward its outstanding federal UI insurance loan and plans to make an additional $50 million payment in September. South Carolina took steps to avoid becoming a FUTA tax credit reduction state in 2012 and expects to continue to avoid such a reduction in 2013 as it continues to repay its loan.

Of more concern to employers in Indiana, South Carolina, and the Virgin Islands, their FUTA tax rate could even be higher in 2013 than noted above if these jurisdictions are subject to the Benefit Cost Ratio (BCR) add-on. The BCR add-on goes into effect beginning with the fifth taxable year of any succeeding consecutive January 1st that there is a balance due on the federal UI loan. The tax is a complicated calculation that compares the average unemployment benefits that have been paid and the tax effort in the state. If the tax effort has not met a certain level, the BCR add-on is imposed. The Virgin Islands was subject to the BCR add-on in 2012. Indiana and South Carolina have indicated that they will take steps to avoid being subject to the add-on.

The most unfortunate part of this whole process, due to the timing inherent in this system,  is that employers do not know of the additional tax liability due until the end of the year. Employers do not get hit with the additional FUTA liability until they file their annual 2013 FUTA report in Jan. of 2014. Thus employers do not become aware of the additional liability very late in the year and it can add some stress to already tight annual budgets. Additionally, employers cost of doing business has increased as many states have raised their state UI rates to help replenish UI trust funds and pay off their federal loans.

Payroll Service depts. should be encouraged however as the Advi$or will note that the 17 states that may be subject to this FUTA tax increase this year is down from 26 states in 2012.

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Time & Pay is a payroll service provider that helps keep your business in compliance with payroll related tax laws in Tennessee. Time & Pay also offers human resources management, automated time and attendance, benefits management and worker’s compensation management.