Last year, the IRS imposed a reduction of the FUTA credit against several states. The credit reduction will be extended into 2017, but only for California and the Virgin Islands.
The Federal Unemployment Tax Act (FUTA) tax is a federal tax on employers in the state’s unemployment insurance program. The tax is imposed on employers covered by the Unemployment Insurance program at a rate of 6.0% on annual wages paid up to $7000.00 per employee. FUTA taxes go into the Federal Unemployment Trust Fund administered by the United States Department of Labor (DOL). With full credits in place, employers pay only 0.6% per covered employee, per year. The credits can be reduced when a state has an outstanding advance or loan for two consecutive years, thereby allowing the Federal government to recover their monies directly from employers.
As a result of outstanding loans, a tax credit reduction will be applied to wages paid in the Virgin Islands and California. The effect on wages in California and the Virgin Islands will be an additional 2.1% of wages up to $7,000.00 per employee.
To learn more about the FUTA Credit Reduction, visit the IRS website.
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