Accuchex Blog

FUTA Credit Reduction Update: California

Posted by Tristan Ruhland on Aug 4, 2016 9:30:00 AM

Once again, employers in California will be faced with another reduction in the FUTA credit. And another increase in payroll costs of $126 per employee.


Employers in four jurisdictions are likely to see Federal Unemployment Tax Act credit , or FUTA, reductions for 2016, according to the U.S. Labor Department.

These are the states of California, Connecticut, Ohio and the U.S. Virgin Islands. The assessment was released earlier this year by the department in a document regarding potential credit reductions in 2016.

Each of these locations was a credit-reduction jurisdiction for 2015.

The bottom line is this: if the jurisdictions still have a federal unemployment loan balance by November 10, 2016, employers in the jurisdictions will be assessed an additional general FUTA credit reduction of 1.8 percent. This reduction will increase their federal unemployment tax costs by up to $126 for each employee.

FUTA and California Employers Free FUTA Tax Calculator

For California employers, the costly prospect of ongoing and increasing FUTA tax rates remains. 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.

How FUTA Tax influence California Employers

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.

California’s Trust Fund Loan balance as of August 02, 2016 was $3,244,555,18.

The Looming Specter of a Benefit-Cost Rate Add-On

The jurisdictions have had a federal unemployment loan balance for at least five years, which means that employers in the jurisdictions could also be assessed an additional credit reduction, known as the benefit-cost rate (BCR) add-on, for 2016.

The actual percentage of the BCR add-on applicable for a jurisdiction varies based on the jurisdiction's efforts to achieve solvency of its unemployment trust fund.

For 2016, employers in California could be assessed a BCR add-on of 0.4 percent, with an additional cost of up to $28 for each employee; Connecticut, 0.1 percent, up to $7 for each employee; Ohio, 0.3 percent, up to $21 for each employee; and the U.S. Virgin Islands, 1.1 percent, up to $77 for each employee.

California will most likely have to apply for a BCR waiver again this year. The waiver, also known as a fifth-year waiver, is sought to prevent employers there from being assessed a BCR add-on for 2016. Fortunately for employers in California, they were not assessed a BCR add-on for 2015 because the Labor Department accepted the applications for relief.

Staying Ahead of Tax and Payroll Management Functions

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. 

Get our free whitepaper “Ongoing FUTA Tax Increases – Why You Need to Plan Now” which explains in much more detail what these higher tax rates are and how it is calculated. Or call Accuchex Payroll Management Services at 877-422-2824.

futa tax and credit reduction guide

Topics: payroll tax filing, UI filing, FUTA credit reduction, california labor law, labor law compliance

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