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Introduction
Recently the US Department of Labor announced a FUTA credit reduction that impacts the 2022 FUTA liabilities in 5 states.
| State | FUTA Credit Reduction | Additional Cost / Employee |
|---|---|---|
| California | 0.3% | $21.00 |
| Connecticut | 0.3% | $21.00 |
| Illinois | 0.3% | $21.00 |
| New York | 0.3% | $21.00 |
| Virgin Islands | 3.6% | $252.00 |
The DOL announced that employers in these states had an outstanding federal unemployment insurance loan which resulted in a credit reduction of 0.3% for calendar year 2022.
What is a Credit Reduction State?
A State is considered a credit reduction state if it has taken out a loan from the federal government to meet its state unemployment benefits liabilities and has not repaid the loans within the allotted due date. States have two years to repay this loan. Should a state have an outstanding balance on January 1 for two consecutive years and does not repay the full amount by November 10th of the second year, it then becomes a credit reduction state until the loan is paid in full.
The DOL (Department of Labor) runs the loan program and makes the credit reduction announcement each year. Additionally, more credit reduction programs may be applicable for a state entering their third and fifth year if the loan is not repaid.
How Does this Affect You as an Employer?
As an employer in a credit reduction state, you will likely owe more in federal unemployment taxation at the end of the year when filing your annual form 940. The current FUTA rate is set at 6% on the first $7,000 in wages per employee. However, employers are granted a 5.4% credit reducing the rate to 0.6%. Being in a credit reduction state will increase the annual rate by 0.3% each year. In addition to the increase in tax liability your company will also be required to file a Schedule A along with the 940. The schedule A will breakdown the liabilities per state for a company in multiple states.
Any increased FUTA tax liability due to a credit reduction is considered a fourth quarter liability and is due by January 31st of the following year.
unemployment benefits liabilities and has not repaid the loans within the allotted due date. States have two years to repay this loan. Should a state have an outstanding balance on January 1 for two consecutive years and does not repay the full amount by November 10th of the second year, it then becomes a credit reduction state until the loan is paid in full.
The DOL (Department of Labor) runs the loan program and makes the credit reduction announcement each year. Additionally, more credit reduction programs may be applicable for a state entering their third and fifth year if the loan is not repaid.
How to Report the Credit Reduction
The additional FUTA liability will be reported on the 940 via the schedule A form. This form will list each state allowing the company to select the check box and insert the FUTA taxable wages the employer paid in each state. If no wages were paid in a certain state the check box and the wage box will remain blank.
How to Report the Credit Reduction
The FUTA credit rate will be reduced by 0.3% each year until the state is no longer considered in a credit reduction state. Below you will see a yearly breakdown of FUTA liability per employee on the annual $7,000 wage base.
| Tax Year | FUTA Tax Rate | FUTA Liability per ee wage base of $7,000 |
|---|---|---|
| 2021 | 0.6% | $42 |
| 2022 | 0.9% | $63 |
| 2023 | 1.2% | $84 |
What to Lookout for in 2023
In November the DOL will begin to release more information on which state is considered a credit reduction state. Once this information is made available they will release the updated credit reduction to be applied to the fourth quarter tax liabilities for those states still impacted. Adjustments will need to be made at that time to the companies 940, Schedule A, and FUTA tax liability calculations.
For more details on the Federal Unemployment Credit reduction please visit the IRS and DOL websites.
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Conclusion
For employers, the FUTA Credit Reduction can be a significant financial burden, especially if they have a large workforce. However, with the help of payroll technology platforms, employers can easily calculate and manage their FUTA tax liabilities, including any credit reductions and stay compliant with federal and state tax laws. By automating the calculation and management of FUTA tax liabilities with the use of a good payroll technology platform, employers can focus on growing their business.
Get in touch with us for an expert-led demo to know more about UZIO payroll services.
