Federal and California Labor Law Increases FUTA Tax Rates for California Employers
It's a sobering reality in California: labor law requires that the FUTA tax rates will continue to increase. The projection of increases through 2018 is also a sobering reminder of the fiscal state of California.
The Federal Unemployment Tax Act (or FUTA) is a United States federal law that imposes a federal employer tax used to help fund state workforce agencies. Employers report this tax by filing an annual Form 940 with the Internal Revenue Service. In some cases, the employer is required to pay the tax in installments during the tax year.
FUTA covers a federal share of the costs of administering the unemployment insurance (UI) and job service programs in every state. In addition, FUTA pays one-half of the cost of extended unemployment benefits (during periods of high unemployment) and provides for a fund from which states may borrow, if necessary, to pay benefits.
A good example is to consider what happened during the recession that started in 2008.
As a direct result of this recession, the unemployment rate in California rose dramatically as jobs became scarce. In June 2008, when the unemployment rate was at 5.6%, Congress approved a 13-week extension. As the recession deepened, Congress passed additional expansions.
At its peak, California had offered 63 weeks of unemployment benefits. Those extensions ended on December 28, 2013. However, beginning in January 2009, California began borrowing to cover the shortfall on its regular 26 weeks of benefits as well as for the additional 37 weeks being provided.
These funds came from the Federal Unemployment Account (FUA) which serves as a loan fund for state unemployment programs to ensure a continued flow of benefits during times of economic downturn. As of June 11, 2015 California’s Trust Fund Loan balance was at $5,531,399,962.81 and is forecast to be down to $5 billion into Q4 2016.
Employers in California: Labor Law Requires FUTA Tax Increases
The table in the infographic below illustrates the FUTA tax increase on employers from 2014 through 2018. The tax will continue to increase 0.3% per year until either the offset credit is exhausted, or the loan is paid off to a zero balance.
The offset credit will be fully restored once the trust fund is solvent.
Beginning in 2014, and continuing for each year the state’s loan remains unpaid, employer’s FUTA credit is reduced by 0.3%, resulting in a tax increase. The table below illustrates the cumulative impact on California employers:
The economic forecast from the state’s Department of Finance projects that, at this rate of increased FUTA taxes, and assuming no change to the revenue or projected payment of benefits, the debt to the federal trust fund will be paid off in 2018.
This projection also assumes that the unemployment rate will decrease to 6.4% in California by 2018. As of June 2015, the state's jobless rate dropped to 6.3% and from 6.4% in May. This reflects a 1.2% decrease since it was at 7.5% in June 2014.
But in 2006, before the recession, the rate was as low as 4.8%.
Staying Ahead of FUTA Tax Rate Increases
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
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.