Unusual FUTA Tax Increases May Apply in 2014
The Federal Unemployment Tax Act (FUTA) tax rate is normally 0.6% of wages paid up to a limit of $7,000 per employee, or $42 per worker per year. FUTA tax is payable in January of the following calendar year with Internal Revenue Service (IRS) Form 940. However, due to a special “Benefit Cost Ratio” or BCR add-on tax employers in affected states and the U.S. Virgin Islands may pay an increased FUTA tax rate in January 2015.
As a review of FUTA taxes, for-profit employers pay federal and state unemployment insurance tax based on taxable wages paid to employees. The FUTA tax rate is normally 6.0%, but typically includes a credit of 5.4% for payment of state unemployment taxes. This makes the effective FUTA tax rate 0.6 %. However, when states need to borrow from the designated federal loan account to cover unemployment claims, and these loans are not repaid within two years, part of the 5.4% FUTA tax credit is reduced. This reduction increases the effective FUTA tax rate in affected states for the years the loan remains unpaid. When this “credit reduction” applies, the FUTA tax rate typically increases by 0.3% per year, or $21 per worker and is further reduced annually by 0.3% until loans are repaid in full.
Additionally, since many of the jurisdictions affected will have had outstanding FUTA loan debt for five years, they could be subject to a special “Benefit Cost Ratio” or BCR add-on tax in 2014, which could increase the FUTA tax by more than the typical 0.3% increase per year. The BCR add-on is less certain but more consequential; for example, Ohio’s effective FUTA rate is expected to increase from 1.5% to 1.8% due to credit reduction alone in 2014. If deemed to be in effect, the BCR add-on tax would add another 1.4%, for a total of 3.2%. The combination of credit reduction and BCR could result in a five-fold increase over the normal FUTA tax rate.
XYZ Corporation pays wages of $150,000 to the corporation’s two employees for 2014. XYZ Corporation’s FUTA tax due on these individual’s wages paid in 2014 would normally be $84 ($14,000 x 0.6%). If the employee worked in Ohio, a credit reduction state, and if the BCR add-on tax is deemed to apply, the total FUTA tax would be $448. For further information, you can view an article from the IRS regarding the subject.
The U.S. Department of Labor (DOL) has identified the following states that could be subject to the FUTA BCR add-on and/or credit reduction for 2014. These include:
Source: U.S. Department of Labor, June 18, 2014
Employers in the credit reduction states should plan on increased FUTA taxes in 2014. However, states can apply for waivers or pay off FUTA loans during the year to avoid these additional taxes, and many states are announcing such actions. The U.S. DOL tracks waiver requests and loan repayments, and determines in mid-November if additional FUTA taxes will apply to specific states for 2014.
If the Payroll Company, Inc. is responsible for filing the annual Form 940 for your organization, we will automatically calculate, collect and pay any additional FUTA tax due as a result of FUTA credit reductions and/or BCR additions. These amounts are due with your 2014 IRS Form 940 and will be collected between December 2014 and January 2015.