2013 Federal Unemployment Tax Act (FUTA) Credit Reductions
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 2013, which will be due by January 31, 2014.
How does Credit Reduction Affect FUTA Employment Taxes?
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, 2013). 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 2013
- IRS: FUTA Credit Reduction
- DOLETA Workforce Security: Final 2013 FUTA Credit Reductions
- DOLETA Workforce Security: Historical FUTA Credit Reductions
The table below lists credit reduction states for tax years 2009 through 2013.
* This is the actual rate in effect for 2013.
** South Carolina qualified for avoidance under FUTA, section 3302(g) for 2011, 2012 and 2013.
*** 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?
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