Employers in Many States Face Higher Unemployment Tax

Employers in 17 states may face higher federal unemployment tax this year. Employers rely on a tax credit that reduces their effective unemployment tax on their Federal Unemployment Tax Act (FUTA) tax return. But according to some sources, the credit may be reduced this year due to their states defaulting on federal loans.

Employers normally get two credits, called the “normal credit” and the “additional credit”, totaling 5.4 percent. This offsets the 6 percent FUTA tax employers are required to pay on the $7,000 for each employee, resulting in a net FUTA tax of 0.6 percent (6.0 percent – 5.4 percent). In a provision under Title XII of the Social Security Act, states can borrow federal funds to cover deficiencies in their Unemployment Insurance (UI) funds, but if they fail to pay the funds back to the federal government the credits are reduced and the FUTA tax rate is increased.

17 States must pay back their outstanding UI loans by November 10 or face becoming credit-reduction states. These are Arizona, Arkansas, California, Connecticut, Delaware, Georgia, Indiana, Kentucky, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Rhode Island, South Carolina, and Wisconsin.

Two of the states, Arkansas and Wisconsin, have already resigned to become credit-reduction states. Arizona and Delaware are in their third year of default and face a 0.6 percent credit reduction.

13 of the states are their fourth year of default and face a 0.9 percent credit-reduction. They are Arkansas, California, Connecticut, Georgia, Kentucky, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Rhode Island, and Wisconsin.

Two of the states are in their 5^th year of default and face a 1.2 percent credit-reduction. They are Indian and South Carolina. Employers in these states may face even higher taxes if the benefit-cost-ratio add on goes in effect. This is a complicated tax calculation applies to states in their 5^th year of default, and attempts to help states equalize the difference between taxes collected and unemployment benefits paid out.

South Carolina however has taken steps to avoid the penalty, paying an initial $144 million payment toward their outstanding debt. They have announced they will pay an additional $50 million in September.