FUTA Tax Rates to Increase for the 2016 Tax Year

Reductions in the credit that employers can apply to their federal unemployment tax rate (FUTA) will be effective again for 2015, according to the federal Labor Department’s Office of Unemployment Insurance. This means that employers in those states are still working to repay their loans from the federal unemployment account. In particula, these continued FUTA credit reductions will impact payroll management for California employers.

Projected FUTA Tax Rate Credit Reductions for 2015 Tax Year

HR and payroll professionals understand that there is a mandatory FUTA rate of 0.6% on the first $7,000 of wages an employee earns each year. This is calculated on a 5.4% credit applied to an actual FUTA rate of 6% that is granted for timely payment of FUTA. Consequently, the FUTA rate almost every employer pays is 0.6%.

However, several states have borrowed funds from federal loan accounts in order to fund their state unemployment payments. California was one of these states. Because many of these states, including California, have yet to repay these loans, they have been penalized with a reduction in the 5.4% credit to their FUTA rate. This is a cost that is borne by the private employers of each state, not the state governments.

The credit reduction to FUTA is normally applied in 0.3% increments that are indexed annually. This is payable each January when Form 940 is filed until the state’s loan is repaid.

Going into the end of 2015, a number of states will have outstanding loans for five or more years. In addition to a further reduction of the FUTA credit rate, these states are subject to an increase in their actual FUTA rates for 2015 with a tax called the Benefit Cost Rate Add-on Tax (BCR).

Fortunately for California the 1.5% BCR add-on tax was waived for this year because California’s request for a waiver was granted once again.

Consequently, the total rate for California employers for tax year 2015 is 2.1%, for a total of $147 per employee earning taxable wages up to or over $7,000 per year.

California's UI Loan Debt Forecast

The California Employment Development Department (EDD) recently published the October 2015 Unemployment Insurance (UI) Fund Forecast. For 2015, employers’ UI tax rates are based on the “F” contribution rate schedule, which is the highest rate schedule, plus a 15% surcharge. The surcharge is required by statute when the UI Fund reserve ratio is below a specified level.

The EDD fund forecast is based on the probability that employers will continue on this schedule through 2017, and beyond, if changes are not made to the financing structure.

California employers have had federal unemployment tax credit reductions since 2012, because of the deficit balance in the UI Trust Fund, As a result, the FUTA tax rate on California payroll has increased by 0.30% each year and is projected to increase from 1.80% for 2014 to 2.10% for 2015, 2.40% for 2016, and 2.70% for 2017.

So, how close is the state of California to paying off its federal UI fund loan deficit?

The California UI Trust Fund ended 2014 with a deficit of $8.6 billion. The Fund is projected to have a deficit of $6.7 billion at the end of 2015, $4.5 billion at the end of 2016, and $2.0 billion at the end of 2017. According to the EDD report “the current financing structure leaves the UI Fund unable to self-correct and achieve a positive fund balance sufficient to withstand an economic downturn.”

So, as things stand today, the UI Trust Fund will only increase in deficit for the foreseeable future.

Other States That Are Subject to the FUTA Credit Reduction

The US Dept. of Labor does not officially designate a state as a “FUTA Credit Reduction state” until late November of each year as the states have until then to pay off any existing unemployment loans. It is expected that the following credit reductions will apply to the following states:

• California   1.5%
• Connecticut 2.0%
• Indiana 1.8%
• Kentucky 1.5%
• New York 1.5%  
• North Carolina 1.5% 
• Ohio 1.5%
• South Carolina (possibly 0% due to loan repayment)
• The US Virgin Islands 1.5% 

It also appears that Arizona will become a FUTA Credit Reduction state in 2016 and Rhode Island will become one in 2017. 

Staying Informed on FUTA and Your Payroll Management

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, call to find out how we can smooth this process (and others) for your business. Let Accuchex help you in managing your HR needs, payroll processes, and staying on top of compliance demands. Get your Free Download: Payroll Outsourcing Guide to help you make an informed decision or call Accuchex Payroll Management Services at 877-422-2824.