The FUTA Tax: What to Know
This article was updated on Oct. 3, 2018.
Your organization could be facing an increase in the Federal Unemployment Tax Act (FUTA) as a result of credit reduction. As a financial executive, you should know as much as you can about FUTA and how to plan for it.
Here are five things you should know about the tax.
1. What Is the FUTA Tax?
FUTA levies a federal tax on employers covered by a state's unemployment insurance (UI) program. The current FUTA tax rate is 6 percent on the first $7,000 of wages you pay to an employee, according to the IRS. Employers typically receive a credit of 5.4 percent on IRS Form 940, reducing the FUTA rate to 0.6 percent, or $42 per employee per year. FUTA fuels state UI funds. When a state's UI trust funds are depleted, it can draw from a designated federal loan account. According to the IRS, if a state lacks the funds to pay UI benefits for residents, they can take a Federal Unemployment Trust Fund loan from the federal government.
2. State Loan Issues
California and the Virgin Islands face a Benefit Cost Rate (BCR) — an add-on tax — because of a FUTA debt that's been outstanding for five or more years. This increases their tax more than the usual 0.3 percent annually. Connecticut and Ohio, on the other hand, repaid their loans and avoided a credit reduction since those states' loans remained at zero late last year.
The credit reduction would represent most of this year's FUTA taxes in California and the Virgin Islands. Employers normally pay FUTA at the 0.6 percent rate during the year with the added amounts (say, an additional 1.8 percent in California's case) paid in January 2017 for 2016. Employers in California and the Virgin Islands had to pay an additional $126 per employee in January ($168 minus the $42 per employee already collected for 2016), according to the ADP report, Eye on Washington: Legislative Update.
If your state continues to have outstanding loans through Nov. 10, an additional 0.3 percent credit reduction may apply in the years ahead, along with the potential for an additional BCR add-on tax. After reductions were announced, organizations have until Jan. 31 to pay any additional liability.
3. Proposed Changes
The proposed federal budget for the next fiscal year contains a provision that would reinstate an old 0.2 percent surtax to the FUTA rate, according to the Department of the Treasury. The budget also proposes raising the FUTA wage base in 2018 to "$40,000 per worker paid annually," indexing the wage base to wage growth for the following years and lowering the net Federal UI tax. It would drop to 0.167 percent from 0.8 percent. "States with wage bases below $40,000 would need to conform to the new FUTA base in order to receive the full FUTA credit," the Department of Treasure reports.
4. Available Resources
Several information sheets exist to help you figure FUTA and other payroll taxes. ADP offers a state-searchable database of payroll taxes, including FUTA. The IRS also offers a timetable and background information to help you identify you potential FUTA requirements, including who must file, when and how.
5. Begin Planning Now
Calculate the additional imminent tax and budget for your employees accordingly, taking into account the new wage base and new FUTA depending on your location. You can also consult the latest version of IRS Publication 15 for a general overview of your FUTA requirements.
Pay attention to FUTA taxes — they can create havoc in an annual budget that doesn't account for them. Staying informed with resources can help make sure you're ready for your tax obligations as an employer.