For many years payroll professionals have grown accustomed to a FUTA rate of 0.6% on the first $7,000 of wages an employee earns each year. Most of us are even familiar with the fact that the real FUTA rate is 6.0%, but there is a 5.4% credit granted for timely payment of SUTA, so the FUTA rate almost everyone pays is 0.6%.
Recently, several states have borrowed funds from federal loan accounts in order to fund their state unemployment payments. Because many of these states have not been able to repay these loans, they have taken a reduction in the 5.4% credit to their FUTA rate. Usually the credit reduction to FUTA is applied in 0.3% increments indexed annually, and this is payable each January when Form 940 is filed until the state’s loan is repaid.
In 2015, many states’ loans will have been outstanding for five or more years. Those states may be subject to an increase in their FUTA rates for 2015, called a Benefit Cost Rate Add-on Tax. This Benefit Cost Rate (BCR) will probably be higher than the 0.3% increment in the past. For example, California’s FUTA rate is expected to go from 1.8% to 2.1% under the regular 0.3% increase, but with a Benefit Cost Rate, it would probably go from 1.8% to 3.5%.
States expected to be affected by this BCR include California, Connecticut, Indiana, Kentucky, Ohio, and the Virgin Islands. Other states could be affected if they borrow from federal funds.
Make plans now if you are an employer in one of these FUTA Credit Reduction states. The FUTA taxes for 2015 that you pay in 2016 will probably be significantly higher than they have been in past years. Some alternatives include options where states can apply for waivers of the BCR, or they might pay off FUTA loans. The official word from the Department of Labor will be announced in November of 2015 regarding which states will have additional FUTA tax rates and/or BCR for 2015.