Payroll managers in California need to take note of the recent notice from the Federal government regarding the status of the 2014 FUTA credit reduction process. Recently, the U.S. Department of Labor notified the Internal Revenue Service (IRS) and the California Employment Development Department that California is once again a credit reduction state as a result of its outstanding loan balances.
So what is a "credit reduction state" and what does that mean for you? According the IRS website:
"Credit reduction state: 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."
Payroll Managers in California and FUTA Credit Reduction
According to the U.S. Department of Labor, for 2014 there are five states and one territory that are subject to the IRS’s FUTA credit reduction process. This process is the adjustment mandated by the IRS if your company employed individuals during the calendar year 2014 and are subject to paying FUTA tax.
According to the IRS, the sole purpose of this additional tax is to recover funds provided by the federal government 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.
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 is 1.2 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.
What the DOL has determined is that if a state has 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. For California, this has resulted in the current tax reduction rate of 1.2 percent.
The bottom line is that, in addition to paying the unemployment tax to the State of California, you will also have to pay an additional amount in unemployment tax to the Federal government. To learn more information on the credit reduction and how the reduction is formulated you should refer to the IRS document posted here at irs.gov.
Staying on top of payroll management
For payroll managers, keeping up to date with continually changing Federal and State regulations and new legislation is a never-ending task. The consequences of mis-filing taxes, missing payments, or other withholding and tax filing errors can be costly for a business and, in some cases, catastrophic. 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.