Many employers to pay more FUTA tax for 2014

Compensation and Benefits Bulletin
Many employers to pay more FUTA tax for 2014The U.S. Department of Labor (DOL) has announced that employers paying wages to employees in eight states and territories will owe additional tax under the Federal Unemployment Tax Act (FUTA) for 2014. These states and territories are referred to as “credit reduction states.” A credit reduction state has taken loans from the federal government to help fund its state unemployment program and has not repaid the debt within the allowable time frame.

The FUTA tax rate is 6.0% and is applied to the first $7,000 in wages paid to an employee during a calendar year. However, employers generally receive a credit of 5.4 percentage points for remitting their state unemployment taxes on time and in full, generating an effective FUTA tax rate of 0.6 percent. As such, employers will typically pay a maximum of $42 per employee in FUTA in a single calendar year.

The FUTA credit is reduced by 0.3% when a state has two consecutive years of unpaid borrowings as of Jan. 1, and the full amount of the loans is not repaid by Nov. 10 of the second year. The credit is reduced again each subsequent year by an additional 0.3% until state borrowing is repaid. Employers in states passing their third and fifth taxable years with an outstanding advance may be subject to an additional credit reduction.

The table illustrates the FUTA credit reduction percentage and effective FUTA tax rate for employers in the eight states and territories affected in 2014: Compensation and Benefits Bulletin FUTA table

Any increased FUTA tax liability stemming from a credit reduction is considered incurred in the fourth quarter and is due by Jan. 31 of the following year (or the next business day if Jan. 31 falls on a weekend or legal holiday). The amount of additional tax owed will be calculated on the first $7,000 of taxable wages paid to an employee in a credit reduction state. Wages subject to credit reduction will be categorized by state and reported on IRS Form 940 Schedule A.

For example, Indiana has been assessed a FUTA credit reduction of 1.5% in 2014. Rather than enjoying the standard effective FUTA tax rate of 0.6%, employers paying wages to employees in Indiana will experience an effective FUTA rate of 2.1%. A maximum of $147 ($7,000 X .021) in FUTA tax per Indiana employee will be due for wages paid in 2014. To illustrate further, a company with 100 Indiana employees earning at least $7,000 during the year will incur a $10,500 increase in their overall 2014 FUTA tax liability.

If any part of the standard $42 per employee FUTA tax was remitted to the IRS prior to quarter four of 2014, then only the difference would be due and payable with Form 940 on Feb. 2, 2015. (Jan. 31, 2015, falls on a Saturday.)

The key to remaining compliant in this area at year-end is to ensure that your company is ready from an operations and financial standpoint.

Employers typically handle their FUTA credit reduction reporting responsibilities outside the normal, automated payroll tax processes. Procedural gaps may expose companies to risk of tax underpayment and misreporting. Implementing sound internal practices can ensure recurring compliance. Consult with your payroll provider to ensure it is ready to handle the wage reporting requirements, as well as the calculation and remittance of additional taxes.

Employers who think they may be in a reduction state could implement an allowance for additional FUTA tax expense, which would help to soften the financial impact caused by a reduction in the FUTA tax credit at year-end. Plan ahead for next year, as loans that remain unpaid will continue to decrease FUTA tax credits for many employers.

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