FUTA Tax Rate Increase

By ADP Research Institute

Employers in seven states and the U.S. Virgin Islands will pay an increased Federal Unemployment Tax Act (FUTA) rate in January 2015 due to unpaid federal loans. The increase will be based on FUTA taxable wages paid in those seven states during 2014. Normally the FUTA tax rate is 0.6 percent of wages paid up to a limit of $7,000 per worker. The seven states affected for 2014 are California, Connecticut, Indiana, Kentucky, New York, North Carolina and Ohio, and the U.S. Virgin Islands

The FUTA tax rate is 6 percent, but employers receive an offsetting credit of 5.4 percent for payment of state unemployment taxes. When state unemployment funds are depleted, though, states draw from a designated federal loan account. If such loans are not repaid within two years, part of the 5.4 percent FUTA tax credit is reduced. This increases the effective FUTA tax rate in those seven states and the U.S. Virgin Islands.

When this credit reduction applies, the FUTA tax typically increases by 0.3 percent, or $21 per employee. This increase is payable with the Internal Revenue Service (IRS) FUTA tax return, Form 940. This credit is further reduced annually by 0.3 percent until loans are repaid. Additionally, if states have had outstanding FUTA debt for five years, they could be subject to a Benefit Cost Ration Add-on tax of 0.50 percent.

In these states, the credit reduction and Benefit Cost Ratio (BCR) Add-on tax amounts represent the majority of taxes due for 2014. Typically, employers would pay the normal 0.6 percent FUTA tax rate throughout the year, with the additional amounts to be calculated and paid in January 2015 for 2014.If Lifetime Benefit Solutions is responsible for filing the Form 940, we would calculate and notify the client of the additional tax amount due, then coordinate payment of this amount based on the client’s current tax payment method arranged through Lifetime Benefit Solutions.

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