In the past few years, certain U.S. states with high unemployment have borrowed from the federal unemployment fund (FUTA) to make up for shortfalls in their state unemployment (SUTA) fund. Employers in these states, which are considered credit reduction states, may owe more tax when they file the annual FUTA (940) Tax Return on January 31.
Generally, the federal unemployment rate (FUTA) is 6.0% on the first $7,000 paid to each employee. Employers take a 5.4% credit, bringing the effective FUTA rate to 0.6%. However, this credit has been reduced for states that are still repaying their borrowed amounts to the federal fund.
If a state has not repaid their loan from the federal government for two consecutive years, employers in that state receive a reduced credit until the loan is paid in full. The credit reduction is 0.3% for each year the state has not repaid their loan.
Currently 19 states are considered FUTA credit reduction states: Arkansas, Arizona, California, Connecticut, Delaware, Florida, Georgia, Indiana, Kentucky, Missouri, North Carolina, New Jersey. Nevada, New York, Ohio, Rhode Island, Vermont, Wisconsin, and the Virgin Islands.
Employers in these states should use Schedule A (Form 940) to calculate the tax due and make the tax deposit via the EFTPS system.
For more information, read the IRS article on FUTA Credit Reduction.
This article was provided by Patriot Software, Inc., a developer of online software for U.S. small businesses, including online payroll software, applicant tracking software, human resources software, an employee portal, and 1099 software. Patriot Software also offers a payroll tax filing service for payroll customers, and is currently developing bookkeeping software and a website builder. For more information, visit www.PatriotSoftware.com.