Federal Unemployment Tax Act (FUTA) Tax Increases on Wages Employers Paid in 2016
Because the state has relied on a federal loan to pay regular Unemployment Insurance (UI) benefits for more than two straight years, California employers will continue to see an increase in their FUTA taxes in January 2017 for wages paid to their workers in 2016.
Tax Changes and Information
The demand for unemployment benefits was unprecedented through the course of the long and difficult recession and the state’s UI Trust Fund continues to have a deficit of approximately $3.4 billion (as of 11/28/16). The continuing federal loan has helped cover the cost of regular unemployment benefits.
California employers fund regular benefits through contributions to the state’s UI Trust Fund on behalf of each employee, and they pay separate FUTA taxes to the federal government to help pay for the administration of the UI program. Those FUTA contributions also pay for UI loans to insolvent states, and federal extension benefits. Any additional employer FUTA contributions are used to help repay the state’s federal UI loan.
Current federal law provides employers with a 5.4 percent FUTA tax credit. However, due to California’s outstanding federal loan, the FUTA tax credit was reduced to 5.1 percent for the 2011 tax year, 4.8 percent for the 2012 tax year, 4.5 percent for the 2013 tax year, 4.2 percent for the 2014 tax year, and 3.9 percent for the 2015 tax year. The FUTA tax credit will be reduced by another 0.3 percent to 3.6 percent for the 2016 tax year due to the outstanding federal loan balance, bringing California’s total 2016 FUTA credit reduction to 1.8 percent. This has resulted in an overall increase in the FUTA taxes California employers’ pay of up to $126 more per employee for the 2016 tax year.
California’s Credit Reduction Waiver Granted
States passing their fifth consecutive January 1 with an outstanding balance may be subject to an additional credit reduction under FUTA 3302(c)(2)(C). However, a waiver of this add-on may be requested by states meeting specified criteria.
On June 29, 2016, Governor Jerry Brown submitted an application to the United States Secretary of Labor requesting this waiver for the additional 0.4 percent credit reduction “benefit cost ratio (BCR) add-on."
Because California’s request for waiver of the BCR Add-on for 2016 was granted on November 10, 2016, employers will not be subject to the additional 0.4 percent FUTA tax credit reduction, and California’s final 2016 FUTA credit reduction will remain at 1.8 percent.
Without any change in the state’s UI funding by the State Legislature, FUTA costs for California employers are anticipated to increase by an additional 0.3 percent each year until the UI Trust Fund regains solvency.
If you have questions on the FUTA credit reduction, Form 940, or Publication 15 (2017) (Circular E) Employer’s Tax Guide, please visit the FUTA Credit Reduction page on the IRS website.