According the U.S. Department of Labor, employers in California and the U.S. Virgin Islands will be paying far higher FUTA taxes in January 2017 because of their unpaid federal loans.
The U.S. Department of Labor recently announced that employers in the state of California and in the Virgin Islands will pay their Federal Unemployment Tax Act, or FUTA, taxes for calendar year 2016 at a higher tax rate than employers in other states.
This is because California and the Virgin Islands failed to repay their outstanding federal unemployment insurance (UI) loans as of November 10, 2016. Originally, there were three states facing increased FUTA rates going into the beginning of the year. But both Ohio and Connecticut managed to beat the deadline finally.
Unfortunately for employers in the remaining two locales, they will face another decrease in their allowable credit reductions. Currently, both California and the Virgin Islands are facing a 1.8% credit reduction for the 2016 tax year, which will result in an additional cost per employee of $126 for employers.
Why the FUTA Tax Rate Has Increased - Again
Businesses are required to pay federal (FUTA) and state unemployment insurance (UI) taxes on wages that are paid to their workers. Normally, the FUTA tax rate is 6.0%. The federal government, however, provides employers a credit of 5.4% for the payment of their respective state’s UI taxes.
This credit makes the actual FUTA tax rate paid just 0.6 % for wages paid up to a limit of $7,000 per employee, or $42 per employee per year.
So far, so good.
There is a provision, however, for allowing states to borrow from a designated federal loan account if that state’s UI trust fund is depleted. This became a major situation following the recession of 2008 for a number of states, including California and the Virgin Islands.
The problem is that if the federal loan is not repaid, including interest, within two years, then the 5.4% FUTA tax credit is reduced each year by 0.3%. This credit reduction essentially increases the effective FUTA tax rate for that state.
The result of this credit reduction, or decrease, is an increase of 0.3%, or $21 per employee, in the actual FUTA taxes paid by the employers. For a business with 100 full-time employees this means an additional $2,100 in unemployment insurance taxes for the year.
This credit is further reduced each year by 0.3% until loans are repaid, as many states experienced in the years after 2008. Now, what began as a 0.3% reduction has ballooned into a 1.8% reduction in credit for at least two of those states.
And if that were not bad enough, California and the Virgin Islands have been subject to what is known as the “Benefit Cost Rate” (BCR) Add-on tax because they have had outstanding FUTA debt for five or more years. If the BCR is applied it would potentially increase their FUTA tax by 0.4 percent, with an additional cost of up to $28 for each employee.
Both California and the Virgin Islands requested a waiver from the BCR Add-on tax for 2016. The waiver, also known as a fifth-year waiver, prevents employers in that state 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.
If a California business has 100 employees in 2016, the total FUTA tax owed per worker – without the BCR - will be $168 ($7,000 x 2.4%) or $16,800 for the tax year. This represents a 300% increase over the normal FUTA payment of $4,200 that employer would have paid without any credit reductions.
Plan for Increased FUTA Tax Payment in January 2017 – and Possibly 2018
Employers in California accrue and pay at the normal 0.6% rate during the calendar year. The additional amount of 1.8% will normally be calculated and due in January 2017 for tax year 2016. 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.
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. As of December 13, 2016 the remaining loan balance for the state of California was still $3,671,240,340.21. This does not include outstanding interest on the loan.
Staying Ahead of FUTA 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 and attendance with payroll, call to find out how we can smooth these processes for your business. Let Accuchex help you in managing your time and attendance, HR needs, payroll processes, and staying on top of compliance demands.
Get our free download 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.