Click here to view the 2014 DOL FUTA credit reduction schedule. [Link Omitted]
The U.S. Department of Labor (DOL) has released a schedule that shows the states that, because they have had an outstanding federal unemployment insurance (UI) loan for at least two years, are subject to federal unemployment tax (FUTA) credit reduction on 2014 federal Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return .
Background. Employers pay FUTA tax at a rate of 6.0% on the first $7,000 of covered wages paid to each employee during a calendar year, regardless of when those wages were earned. This tax may be offset by credits of up to 5.4% (known as the "normal credit" and "additional credit") against their FUTA tax liability for amounts paid to a state UI fund by January 31 of the subsequent year. The net FUTA tax rate for most employers is therefore 0.6% (i.e., 6.0% - 5.4%).
Under Title XII of the Social Security Act, states with financial difficulties can borrow funds from the federal government to pay UI benefits. If a state defaults on its repayment of the loan, the amount of state UI tax credits that employers in the state may claim is reduced. Employers in credit reduction states pay FUTA tax at a 0.3% rate higher than other employers, beginning with the second consecutive January 1 in which the loan is not repaid by November 10 of that year. For each succeeding year in which there is a balance, the credit is further reduced by an additional 0.3%.
2014 FUTA credit reduction states. The following seven states and the Virgin Islands are FUTA credit reduction states for the 2014 tax year because they did not repay their outstanding federal UI loans by Nov. 10, 2014: California, Connecticut, Indiana, Kentucky, New York, North Carolina, and Ohio. In 2013, there were 13 states (and the Virgin Islands) that were credit reduction states.
1.2% credit reduction. Employers in California, Kentucky, New York, North Carolina, Ohio, and the Virgin Islands are subject to a 1.2% credit reduction on their 2014 FUTA tax return (maximum $84 increase per employee) because of their state's failure to repay its outstanding federal loans for five consecutive years.
1.5% credit reduction. Indiana employers are subject to a 1.5% credit reduction on their 2014 FUTA tax returns (maximum $105 increase per employee) because of Indiana's failure to repay its outstanding federal loans for six consecutive years.
Connecticut. Connecticut employers are subject to a 1.7% credit reduction on their 2014 FUTA tax returns (maximum $119 increase per employee). Included in the 1.7% is a 1.2% credit reduction because of Connecticut's failure to repay its outstanding federal loans for five consecutive years. There is also a 0.5% Benefit Cost Ratio (BCR) add-on. The BCR add-on (see 20 CFR 606.20 and 20 CFR 606.21) applies beginning with the third or fourth consecutive year in which the federal loan has not been repaid and state unemployment insurance rates do not meet minimum federal levels. In addition, states may be subject to the BCR add-on beginning with the fifth year in which a federal loan balance still exists. The Connecticut 0.5% BCR add-on is in effect because this was the fifth year in which a federal loan balance still existed.
Former credit reduction states. Arkansas, Delaware, Georgia, Missouri, New Jersey, Rhode Island, and Wisconsin repaid their outstanding federal UI loans. As a result, the net 2014 FUTA tax rate for employers in these states will be 0.6% (i.e., the rate for employers that are not in credit reduction states).
South Carolina. South Carolina has received approval from the DOL to avoid being a FUTA credit reduction state for the 2014 tax year.
BCR add-on waivers. California, Indiana, New York, North Carolina, Ohio, South Carolina, and the Virgin Islands applied for, and received, waivers from the BCR add-on credit reduction.
Connecticut did not apply for a waiver from the BCR add-on credit reduction.
References: For imposition of FUTA, see FTC 2d/FIN H-4726 ; United States Tax Reporter 33,014 ; TaxDesk 550,501 ; TG 9801, Checkpoint Newsstand Nov 12, 2014.