You are allowed to credit the state unemployment taxes you pay against your federal tax liability.
Maximum credit: 5.4%. However, the maximum FUTA credit is reduced 0.3% every year a state has loans outstanding with the Department of Labor (DOL).
Worse: After five years, states are also subject to a benefit cost ratio add on (BCR add on), which reduces the FUTA credit further.
Upshot: Even if you have good experience and lay off few workers, your FUTA tab will increase. The DOL recently issued a report that details the potential credit reduction states for 2015.
Who’s on the hit list? The DOL’s 2015 Solvency Report notes that at the beginning of this year, 18 states had approximately $13 billion in outstanding federal loans; 17 states had reached what the DOL considers the minimal level of adequate solvency to pay unemployment benefits. Six states are potential credit reduction states for 2015:
- California: 1.5% basic reduction and 1.4% BCR add-on. Potential FUTA tax rate: 3.5%
- Connecticut: 1.5% basic reduction and 0.6% BCR add-on. Potential FUTA tax rate: 2.7%
- Indiana: 1.8% basic reduction and 0.9% BCR add-on. Potential FUTA tax rate: 3.3%
- Kentucky: 1.5% basic reduction and 0.7% BCR add-on. Potential FUTA tax rate: 2.8%
- Ohio: 1.5% basic reduction and 1.2% BCR add-on. Potential FUTA tax rate: 3.3%
- South Carolina: 1.8% basic reduction and 0.3% BCR add-on. Potential FUTA tax rate: 2.7%.
New York and North Carolina recently paid back their federal loans, and other states can remove themselves from this list by paying back their loans by Nov. 10. The IRS will release the final list of credit reduction states shortly after that date. In the interim, however, it’s prudent to plan for a credit reduction by budgeting for an increased fourth-quarter FUTA deposit.
THREE INTEREST-FREE BITES AT THE APPLE: The IRS has concluded in email advice that you won’t owe interest if your FUTA taxes are underdeposited for the first three quarters of a year. However, interest and penalties will accrue if you fail to pay the tax and file Form 940 by Jan. 31 of the following year. (ECC 201518014)