The Federal Unemployment Tax Act (FUTA) tax is a federal tax on employers in the state’s unemployment insurance program. The 2015 FUTA tax rate is 6.0 percent on the first $7,000 of wages subject to FUTA per employee. FUTA taxes go into the Federal Unemployment Trust Fund administered by the United States Department of Labor (DOL).
Understanding the FUTA Tax
Employers can generally take a credit of up to 5.4 percent of FUTA taxable wages if they’ve paid their state unemployment taxes in full compliance and if their state is not a credit reduction state. FUTA taxes are figured quarterly on the first $7000 of each employee’s taxable wages for the year, and filed on Form 940 annually. States that take loans from the Federal Trust because they can’t pay unemployment insurance benefits, but don’t pay the loans back on time, become credit reduction states and owe a greater amount of tax
What FUTA Credit Reduction Means for Employers
States that carry unemployment insurance loan balances over several years into the fifth year incur further penalty, the benefit-cost rate (BCR). Reduced tax credits and the BCR mean higher FUTA taxes. Doing business as an employer in credit reduction states means employers have higher taxes due for Form 940. California’s 1.5 percent basic reduction would have jumped to 3.4 percent with a 1.4 percent BCR without the waiver.
The BCR waiver avoids the additional penalty for employers in states that applied and received it. The five states that received the BCR waiver for 2015 avoid a potentially higher credit reduction.
The FUTA credit reduction for 2015 is calculated by taking the credit reduction due to having an outstanding loan balance and adding (or subtracting if waived) the BCR add-on in states that had not repaid their outstanding loans by November 10, 2015.
2015 Credit Reduction States
There were eight states and one jurisdiction in 2015 with a potential FUTA credit reduction. These states were California, Connecticut, Indiana, Kentucky, New York, North Carolina, Ohio, South Carolina, and Virgin Islands.
Indiana, Kentucky, New York, North Carolina, and South Carolina avoided FUTA credit reduction by repaying outstanding advances before November 10th.
California, Connecticut, Ohio, and the Virgin Islands are responsible for at least a 1.5 percent credit reduction.
California, Indiana, Kentucky, Ohio, and the Virgin Islands applied for a waiver of the fifth year benefit-cost rate (BCR) add-on and received the waiver. Kentucky also applied for and received a “Cap” on their 2015 FUTA credit reduction.
Connecticut is subject to a fifth year BCR add-on to their credit reduction.