2014 guide to unemployment insurance
Federal unemployment insurance
FUTA credit reduction: the added burden of long-term debt
In 1939, the Federal Unemployment Insurance Tax Act (FUTA) was passed, requiring that employers make contributions to offset the federal costs of administering the UI system. Effective 1 July 2011, the FUTA tax rate is 6% of a maximum of $7,000 in covered wages per employee per year. In consideration of state and employer compliance with federal guidelines, employers are eligible for a maximum FUTA credit of 5.4%, thereby resulting in a normal net FUTA rate of 0.6%.
Recap of the 2013 FUTA credit reduction states
Employers in 13 states and the Virgin Islands were subject to the FUTA credit reduction for calendar year 2013 and consequently they were subject to a higher FUTA tax rate than employers in other states because these states failed to repay their outstanding federal UI loans by 10 November 2013.
The increased FUTA taxes were due from employers with their fourth quarter 2013 federal unemployment tax deposit on 31 January 2014. (“States with 2013 Federal Unemployment Tax Act (FUTA) credit reductions,” U.S. Department of Labor, 12 November 2013.)
Projected 2014 FUTA credit reduction states
Several states plan to avoid a 2014 FUTA credit reduction by repaying their federal loan balances before 10 November 2014. States may also request a waiver of the standard FUTA credit reduction or Congress could adopt the President’s proposal to waive the FUTA credit reduction entirely for 2014.
President’s fiscal year 2015 budget would make FUTA changes
Similar to last year, the Administration is proposing to address the continued insolvency of state unemployment insurance (UI) trust funds by raising the federal unemployment insurance (FUTA) wage base to $15,000 starting in 2017 and indexing it each year thereafter based on wage growth. The purpose of this proposal is to force 32 states to increase UI tax by raising their UI wage base to the $15,000 federal minimum.
In 1976, a temporary 0.2% surtax was added to the FUTA rate. The surtax was extended numerous times until it was allowed to lapse effective 1 July 2011. The Administration again proposes to reinstate the 0.2% surtax and to make it permanent effective with wages paid on or after 1 January 2015.
So that employers aren’t subject to an increase in their FUTA tax because of the increase in the FUTA wage base, the budget also calls for lowering the net FUTA tax rate from 0.8% (0.6% plus the reinstated temporary surtax of 0.2%) to 0.37%, effective in 2017.
The budget again addresses concern about the adverse impact of higher UI tax on job growth by proposing a two-year (2014 and 2015) waiver of interest charges applicable to states that continue to carry a federal UI loan balance. For 2014 and 2015, the FUTA credit reduction paid by employers in states carrying a UI loan balance would also be waived.
Raising the federal wage base could have a significant monetary impact on large multi-state employers.
Example: Assume that in 2014 an employer has a US workforce of 10,000 employees distributed evenly in the states of California, New Jersey, New York, Ohio and Texas and that its average SUI rate in these states is 3.0%. The employer’s SUI taxes would increase by close to $1.5 million as a result of raising the states’ wage base to a minimum of $15,000.