California’s Unemployment Insurance (UI) fund has been insolvent since January 2009. Since then, several reform proposals intended to bring solvency to the fund have been circulated with no success. Because the state has relied on federal loans to pay regular UI benefits for more than three straight years, California employers will see an increase in their Federal Unemployment Tax Act (FUTA) offset credit in January 2014 for wages paid to their workers in 2013.
If a state has relied on a federal loan for two consecutive years, employers face a federal tax increase for the following tax year. Current federal law provides employers with a 5.4% FUTA tax credit. However, each year California’s fund is insolvent, employers lose 0.3% of the FUTA offset credit which amounts to an additional $21 payroll tax increase per employee per year until the loans are repaid. The reduction of the offset credit in 2013 cost California employers $579.7 million, and is expected to cost $894.7 million in 2014.
The U.S. Department of Labor has identified the states which have defaulted on their 2013 Federal Unemployment Insurance (UI) loans causing employers in these states to owe additional FUTA tax for the tax year 2013. The following are the FUTA tax rate increases for each affected state:
0.6% - Delaware
0.9% - Arkansas, California, Connecticut, Georgia, Kentucky, Missouri, New York, North Carolina, Ohio, Rhode Island, Wisconsin
1.2% - Indiana, Virgin Islands
The rates above will be applied to the first $7,000 that each FUTA taxable employee earned for the tax year 2013 and is due with the employer’s Federal Form 940 by January 31, 2014.
Example: An employee who works for Company X, receiving wages of $18,000 for the year. Company X’s FUTA tax due on the individual’s wages paid in 2013 would normally be $42 ($7,000 x 0.6%). However, because California has defaulted on loan repayments for the third consecutive year, making it a credit reduction state, the total FUTA tax would be $105 ($7000 x (0.6% + 0.9%)).
The CRA has worked closely with Governor Brown’s administration to seek a legislative fix that will help return the unemployment insurance fund to solvency, treat each industry equitably, and provide systemic changes to mitigate fraud and abuse. The politics of the issue and the need for 2/3rds of the legislature to agree has proven a significant barrier to reform. The CRA continues to work with the Brown administration on a variety of ways to address this crisis and will continue pushing for reform in 2014.
Employers in states which are affected by a tax rate increase should plan on increased FUTA taxes in 2014 (payable in January 2015). For additional information regarding the FUTA credit reduction or Form 940, please visit the FUTA Credit Reduction page on the IRS website.