Have you estimated your FUTA tax for 2015?
In 2014 California employers incurred an 
additional 1.2% on FUTA taxable wages that were payable January 2015.
For 2015, this scenario could be much worse for California employers. The total FUTA tax could be as high as 3.6%!
How is that possible? Let me show you why this scenario is possible.
First, did you know that California is now in its fourth year as a FUTA credit reduction state and there is almost no hope of paying off its FUTA debt in the short term? Implication: California’s FUTA credit reduction tax rate could increase to 2.1% for 2015 (0.6% FUTA tax and 1.5% Credit Reduction State tax).
Second, because California has had an outstanding FUTA debt for five years now, the state is subject to a special “Benefit Cost Ratio (BCR)” add-on tax since 2014. If this add-on tax is applied, it would add another 1.5%, for a total of 3.6% (Total FUTA tax plus BCR add-on tax). And, although a request for a waiver of the BCR add-on tax could be applied for, it is possible for the Federal government to refuse to grant the waiver.
As you can see above, the combination of credit reduction and BCR could result in a five-fold increase over the normal FUTA tax rate.
Free FUTA Tax Calculator
To help you estimate the possible effect of this dramatic increase in FUTA taxes on your business - and your ability to manage for example payroll and cash flow - we have developed an online FUTA Tax calculator that you can use to estimate your 2015 FUTA Tax bill.
Explanation: What is a "credit reduction state" and what does that mean for you?
The IRS website define a credit reduction state as follows: "A state that has not repaid money it borrowed from the federal government to pay unemployment benefits is a “credit reduction state.” The Department of Labor determines these states. If an employer pays wages that are subject to the unemployment tax laws of a credit reduction state, that employer must pay additional federal unemployment tax when filing its Form 940."
According to the IRS, the sole purpose of this additional tax is to recover funds provided by the federal government from its Federal Unemployment Account (FUA) to help states cover their unemployment benefit liabilities. Keep in mind that this tax is paid by employers and is not withheld from employees’ wages. And, as of March 3, 2015, California’s Trust Fund Loan balance was at $8,572,349.59. This represents over half of the total outstanding loan balance for all states who still have outstanding loan balances.
Please follow this link to visit the IRS website and learn more.
What does this mean for you and your business?
The IRS states that the result of being an employer in a credit reduction state is a higher tax due on the Form 940. Any increased FUTA tax liability due to a credit reduction is considered incurred in the fourth quarter and is due by January 31 of the following year. For employers in California the credit reduction tax rate for 2015 is estimated at 1.5 percent.
According to the IRS the FUTA tax levies a federal tax on employers covered by a state’s Unemployment Insurance (UI) program. The standard FUTA tax rate is 6.0 percent on the first $7,000 of wages that are subject to FUTA. The funds from this FUTA tax create what is known as the Federal Unemployment Trust Fund, which is administered by the United States Department of Labor, or DOL.
Generally, employers may receive a credit of 5.4% when they file their Form 940 to result in a net FUTA tax rate of 0.6 percent, or 6.0 percent tax rate less the 5.4 percent credit.
However, the DOL has determined that if a state has an outstanding loan balances on January 1st for two consecutive years, and does not repay the full amount of its loans by November 10th of the second year, then the FUTA credit rate for employers in that state is reduced until the loan is repaid. This is applied on a reduction schedule of 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 that the state hasn't repaid its loan in full. Therefore these gradual reductions in the tax credit represent a loss of:
- 0.3 percent FUTA credit for 2011,
- 0.6 percent FUTA credit for 2012,
- 0.9 percent FUTA credit for 2013
- 1.2 percent FUTA credit for 2014, and
- 1.5 percent FUTA credit for 2015.
Free White Paper:
Our new and free white paper “Ongoing FUTA Tax Increases – Why You Need to Plan Now” explains in much more detail what these higher tax rates are and how it is calculated. In this white paper you’ll learn:
- What exactly is FUTA and how it’s applied
- How the current situation developed
- The looming problem facing California employers
- What this mean to you in real dollars
- How to calculate/estimate your FUTA tax implications for 2015
Please follow this link to download the free white paper.
In Summary
For payroll managers, keeping up to date with continually changing Federal and State regulations and new legislation is a never-ending task. While some things, such as FUTA credit reductions, may be beyond your control, the consequences of mis-filing taxes, missing payments, or other withholding and tax filing errors can be costly for a business.
However, there are options to doing everything yourself.
If Accuchex is not currently filing your taxes or helping you to integrate your time & attendance with payroll, call to find out how we can smooth these processes for your business. Let Accuchex help you in managing your time & attendance and HR needs, payroll processes, and staying on top of compliance demands.
If you have any questions about FUTA Tax or Payroll Management Services call us to talk to our experts at 877-422-2824.
Author: Jim Ruhland