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    2014 Federal Unemployment Tax Act (FUTA) Credit Reductions

    Article ID: 2001246

    What is a Credit Reduction State?

    Some states take loans from the Federal Unemployment Trust Fund if they lack the funds to pay unemployment insurance benefits for residents of their states. If a state has outstanding loan balances for two consecutive years, the FUTA credit rate for employers in that state will be reduced until the loan is repaid, ultimately requiring employers to pay additional unemployment tax when filing Form 940 and Schedule A for 2014, which will be due by February 2, 2015.

    How does Credit Reduction Affect FUTA Employment Taxes?

    The standard FUTA tax rate is 6.0% on the first $7,000 of wages subject to FUTA. However, employers generally receive a credit of 5.4% for state unemployment taxes when they file their Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, resulting in a net FUTA tax rate of 0.6% (6.0% - 5.4% = 0.6%), which equates to a maximum FUTA tax of $42.00 per employee, per year.

    However, the result of being an employer in a credit reduction state is a higher tax due on the Form 940. FUTA credit reduction states will see a decrease in the standard 5.4% credit, which will increase their FUTA taxes (retroactive to January 1, 2014). The reduction in FUTA tax credit is 0.3% for the first year and an additional 0.3% for each succeeding year until the loan for that specific state is repaid.

    For example, an employer in a state with a credit reduction of 0.3% would compute its FUTA tax by reducing the 6.0% FUTA tax rate by a FUTA credit of only 5.1% (the standard 5.4% credit minus the 0.3% credit reduction) for an effective FUTA tax rate of 0.9% for the year. This example would be followed for each state subject to credit reduction.

    In short, credit reduction states do not qualify for the standard credit of 5.4%. This standard credit would decrease based on the states credit reduction rate.

    Credit Reduction States for 2014

    The Federal government has identified as many as 8 states on its websites that are facing FUTA credit reductions for 2014. Information about the credit reduction states can be found at the following sites:


    The table below lists credit reduction states for tax years 2009 through 2014.

    State200920102011201220132014*
    Arizona - - - 0.3% --
    Arkansas - - 0.3% 0.6%0.9%-
    California
    - - 0.3% 0.6%0.9% 1.2%
    Connecticut
    - - 0.3% 0.6%0.9%1.7%
    Delaware
    - - - 0.3%0.6%-
    Florida - - 0.3% 0.6% --
    Georgia - - 0.3% 0.6% 0.9%-
    Illinois - - 0.3% - --
    Indiana
    - 0.3% 0.6% 0.9%1.2%1.5%
    Kentucky
    - - 0.3% 0.6%0.9%1.2%
    Michigan 0.3% 0.6% 0.9% - --
    Minnesota - - 0.3% - --
    Missouri - - 0.3% 0.6%0.9%-
    Nevada - - 0.3% 0.6% --
    New Jersey - - 0.3% 0.6% --
    New York
    - - 0.3% 0.6%0.9%1.2%
    North Carolina
    - - 0.3% 0.6%0.9%1.2%
    Ohio
    - - 0.3% 0.6%0.9% 1.2%
    Pennsylvania - - 0.3% - --
    Rhode Island
    - - 0.3% 0.6%0.9%-
    South Carolina - 0.3% ** ** ****
    Vermont - - - 0.3% -
    Virgin Islands
    - - 0.3% 1.5%***1.2%***1.2%
    Virginia - - 0.3% - --
    Wisconsin- - 0.3% 0.6% 0.9-

    * This is the actual rate in effect for 2014.
    ** South Carolina qualified for avoidance under FUTA, section 3302(g) for 2011, 2012, 2013 and 2014.
    *** Virgin Islands was subject to an additional reduction under FUTA, Section 3302(c) for 2012 and 2013.

    When is FUTA Tax Due and How is it Reported?

    The 2014 FUTA tax is due and payable by February 2, 2015, and reported on IRS Form 940 for 2014, Employer's Annual Federal Unemployment (FUTA) Tax Return and Schedule A (Form 940) for 2014.


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    Intuit Payroll is committed to keeping you up-to-date with your payroll service - making sure you have the latest information. We encourage you to revisit this article periodically for any updates.

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    Joan2/26/2013

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