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Surprise FUTA Tax Bill is in Our Future

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Under the provisions of the American Federal Unemployment Tax Act (FUTA), a federal tax is levied on employers covered by the Unemployment Insurance program at a current rate of 6.0% on wages up to $7,000 a year, paid to a worker. The law, however, provides a credit (basically a discount) against federal tax liability of up to 5.4% to employers who pay state taxes timely under an approved state UI program. Therefore, the employer pays an effective federal tax of 0.6% or a maximum of $42 per covered worker, per year.

During times of high unemployment claims, a state may borrow funds from the federal government if its reserve falls short, which is what happened with many states during 2020. When funds are borrowed, the state has two years to repay the loan in full by November 10 of that second year. Should a state not pay the balance in full, the federal government penalizes all businesses in that state by reducing the amount of the credit. This is called a FUTA Credit Reduction. They then apply this extra tax collected towards the balance the state owes them. The federal government will get their money one way or another.

The U.S. Department of Labor publishes a list of states that have an outstanding balance, and if the balance is not paid by November 10, 2022, then there will be a .3% reduction in the credit. In essence, this will increase the net rate of .6% to .9%. A 50% increase in the tax! The long-term bad news is that for each subsequent year the balance remains, there will be a .3% increase. Therefore, if these states don’t repay their balance by November 10, 2023, your FUTA tax rate will double from .6% to 1.2%. (.6% + .3% + .3%)

The outstanding balance list currently includes California, Colorado, Connecticut, Illinois, Massachusetts, Minnesota, New Jersey, New York, Pennsylvania and the U.S. Virgin Islands. The U.S. Virgin Islands has been on this list for the past 12 years, since they are still repaying a loan from 2008. With the .3% compounding annually, their FUTA rate will be 2.4% for 2022.

The final list will be published in late November, early December, and the increase in the tax rate is retroactive to January 1, 2022. Considering most employees met their $7,000 taxable wage limit earlier this year, it’s probable that you have already paid the Federal Unemployment Tax on these wages. The credit reduction will create a retroactive tax increase due about a month later, on January 31, 2023.

Here is a list of every state and their fund balance, as of January 1, 2022. States in Green should have a sufficient reserve to cover a mass amount of claims. Those in Red have a positive fund balance, but a large amount of claims could force them to borrow from the federal pool. Those at the very bottom have no reserve and owe the federal government, which is why they are on this list.

State Trust Fund Solvency

While I make every attempt to ensure the accuracy and reliability of the information provided in this article, the information is provided “as-is” without warranty of any kind. PayMaster, Inc or Romeo Chicco does not accept any responsibility or liability for the accuracy, content, completeness, legality, or reliability of the information contained. Consult with your CPA, Attorney, and/or HR Professional as federal, state, and local laws change frequently.

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