If a state has outstanding loan balances on January 1st for two consecutive years and it does not repay the full amount of its loans by November 10th of the second year, it is considered a credit reduction state.
According to the US Department of Labor’s tax chief, California and the Virgin Islands are the only two states to have a FUTA credit reduction for calendar year 2017. Employers in California and the Virgin Islands will pay their FUTA taxes for calendar year 2017 at a higher federal unemployment (FUTA) tax rate than employers in other states because the state and territory failed to repay their outstanding federal UI loans by November 10, 2017.
The increased 2017 FUTA taxes are due from employers with their fourth quarter 2017 federal unemployment tax deposit, due January 31, 2018.
The Social Security Act requires a reduction in the FUTA tax credit to start when a state has outstanding federal loans on January 1 of two consecutive years. The reduction in the FUTA tax credit is 0.3% for the first year and an additional 0.3% (or more) for each succeeding year until the loan is repaid.
Federal law discourages states from carrying their loan balances over several years by further reducing the FUTA credit beginning in the fifth year of the loan. This add-on to the FUTA credit reduction is referred to as the Benefit Cost Rate (BCR).
The BCR triggered on again this year for California and the Virgin Islands, which began borrowing in 2009 and still had an UI loan balance as of January 1, 2017. The BCR penalty may be waived if the state’s governor submits an application to the US Secretary of Labor no later July 1 of the penalty year; and the state takes no action (legislative, judicial, or administrative) during the 12-month period ending September 30 that would reduce UI trust fund solvency during that same time period.
Details for 2017
For 2017, California and the Virgin Islands faced a potential FUTA credit reduction because there was an outstanding loan balance as of January 1, 2017. California and the Virgin Islands began borrowing in 2009 and had outstanding loan balances on January 1 in each of the years of 2011 through 2017. As a result and because a loan balance continued as of November 10, 2017, California and the Virgin Islands have a 2.1% credit reduction for 2017, for a total FUTA rate of 2.7%.
California and the Virgin Islands requested a waiver of the additional Benefit Cost Rate (BCR) for 2017 and were approved.
Trump Administration’s FY 2018 budget proposal would expand use of FUTA credit reductions
In addition to a FUTA credit reduction for failing to pay federal UI loan balances, the Trump Administration proposes that the credit reduction also apply if a state fails to meet a federally specified solvency standard for two consecutive years. The proposal states that by expanding the FUTA credit reduction in this way, states would have an incentive to adequately fund their trust funds before they face debt and borrowing.
The FUTA credit reduction rules would be changed to apply a credit reduction to states that have an Average High Cost Multiple (AHCM) of less than 0.5 on two or more consecutive January firsts. An AHCM of 1.0 indicates that a state has sufficient funds in its trust fund account to pay benefits for one year of an average recession. As of December 31, 2016, the Department estimated that only 20 states had sufficient reserves to weather another recession. (U.S. Department of Labor FY 2018 proposed budget.)
2017 Form 940 and Schedule A should soon be released
The additional FUTA due is figured on Form 940, Schedule A and is paid with the quarterly FUTA due (if applicable). The final version of the 2017 Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, and Form 940, Schedule A, Multi-state Employer and Credit Reduction Information, should soon be released by the Internal Revenue Service.
For more information on FUTA taxes, see the U.S. Department of Labor’s website: https://oui.doleta.gov/unemploy/DataDashboard.asp
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This information is provided as a courtesy, may change and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney or Advisor.