Pre-Employ Blog

Several States at Risk of Higher FUTA Tax Rates

Posted by admin on May 07, 2013

Already, employers in a number of states are subject to higher tax rates due to outstanding debt owed to the federal government because of loans taken out to pay unemployment insurance during the recession. Now, businesses in qualifying states face another potential federal unemployment tax hit in addition to the increases called for in the president's recent budget proposal.

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Seldom invoked increase could actualize
Debt owed to the federal government continues to be a problem for states that took out loans to pay jobless benefits. The most recent trouble spot for employers comes in the form of a rarely implemented FUTA increase that could be triggered and applied to a number of states that continue to owe money.

The Benefit Cost Ratio clause, a tax increase that is manifested in FUTA credit reductions, is applicable when states continue to maintain outstanding UI loan debts that exist five years past the start year of the loan, according to UWC Strategy. The BCR add-on kicks in for every taxable year beginning with the fifth consecutive January 1st, and any other year after, a states owes on the balance of a UI loan.

This development comes after President Barack Obama's budget proposal for fiscal year 2014 addressed a number of unemployment tax issues.

The most pressing aspect is an immediate FUTA rate increase of 25 percent applied to employers in all 50 states. Additionally, the budget proposal would increase the FUTA wage base to $15,000 in 2016 if approved. The administration said the measures are being taken to reduce the net FUTA tax rate to 0.8 percent by 2014.

19 states at risk
The true value of the BCR add-on itself is calculated through a complex formula that totals the increase by weighing average benefits paid out by the state and applicable taxable wages.

According to UWC Strategy, Indiana and South Carolina are at risk of having the BCR imposed on their rates in 2013. Arkansas, California, Connecticut, Florida, Georgia, Kentucky, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Rhode Island and Wisconsin are at risk in 2014; while Arizona, Delaware and Vermont risk triggering the increase in 2015 if outstanding debts are not resolved.

However, relief exists in the form of a waiver states must request to avoid a credit reduction. UWC Strategy also said if states and employers take action in advance, potential cap limits and credit reduction avoidance can be extended to them.

Unemployment insurance is a complicated employer responsibility and businesses would do well to work with an HR partner that can automate compliant UI payouts and management.

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Topics: HR Compliance, Tax Updates, Unemployment