Federal Unemployment Tax Act (FUTA) Increases for 2013

ADP Research Institute®

Federal Unemployment Tax Act (FUTA) Increases for 2013

The Federal Unemployment Tax Act (FUTA) tax rate is normally 0.6% of taxable wages paid, or $42 per employee per year. However, employers in thirteen states and the U.S. Virgin Islands will pay an increased tax rate in January 2014, based on FUTA taxable wages paid in the affected jurisdictions during 2013.

As background, most for-profit employers pay federal and state unemployment insurance (UI) taxes on wages paid. The FUTA tax is nominally 6.0%, but includes a credit of 5.4% for payment of state UI taxes, making the effective (net) FUTA tax rate 0.6 % of wages paid up to the taxable wage limit of $7,000. However, when state UI funds are depleted, states draw from a designated federal loan account, and if such loans are not repaid within two years, part of the 5.4% FUTA tax credit is reduced, thereby increasing the effective FUTA tax rate in affected states to repay any loans.

When this “credit reduction” applies, the FUTA tax typically increases by 0.3%, or $21 per worker, payable in January of the following calendar year with Internal Revenue Service (IRS) Form 940. This credit is further reduced annually by 0.3% until loans are repaid. The U.S. Department of Labor has identified the states that are subject to the FUTA Credit Reduction for 2013. These include:

Credit Reduction
Over Normal
  Arkansas 0.9% 1.5% $105 150%
  California 0.9% 1.5% $105 150%
  Connecticut 0.9% 1.5% $105 150%
  Delaware 0.6% 1.2% $84 100%
  Georgia 0.9% 1.5% $105 150%
  Indiana 1.2% 1.8% $126 200%
  Kentucky 0.9% 1.5% $105 150%
  Missouri 0.9% 1.5% $105 150%
  New York 0.9% 1.5% $105 150%
  North Carolina 0.9% 1.5% $105 150%
  Ohio 0.9% 1.5% $105 150%
  Rhode Island 0.9% 1.5% $105 150%
  Virgin Islands 1.2% 1.8% $126 200%
  Wisconsin 0.9% 1.5% $105 150%

Source: U.S. Department of Labor

An employee works for ABC Corporation, receiving wages of $60,000 for the year. ABC Corporation’s FUTA tax due on the individual’s wages paid in 2013 would normally be $42 ($7,000 x 0.6%). If the employee worked in California, which is a Credit Reduction state for the third consecutive year, the total FUTA tax would be $105 ($7,000 x (0.6% + 0.9%)).

For additional information, view this linked article from the IRS. If ADP is responsible for filing Form 940 for your organization, ADP will automatically calculate and pay any additional FUTA tax due as a result of FUTA Credit Reductions, and you will receive an invoice in January 2014 for Credit Reduction amounts due with your 2013 IRS Form 940.

What to Expect for 2014

The FUTA tax rate is scheduled to remain at 0.6% of wages paid, up to the taxable wage limit of $7,000, or $42 per employee per year. Employers in the Credit Reduction states identified above should plan on increased FUTA taxes in 2014 (payable in January 2015). Unless a state pays off the loan or takes other specified actions, the FUTA Credit Reduction will automatically increase by another 0.3% in 2014; however, this will not be determined until mid-November of 2014.

In addition, because the jurisdictions in the chart (with the exception of Delaware) will be in the fourth year of credit reduction status, they may be subject to special “2.7% Add-On” or “Benefit Cost Ratio (BCR)” taxes in 2014, which could increase the FUTA tax by more than the typical 0.3% per year. (This occurred last year in the Virgin Islands, which had a net FUTA tax rate of 2.1% for 2012.) States can take specified actions to avoid these additional taxes, so the outcome for 2014 is difficult to predict.

Interest Assessments

Employers should also plan for annual interest assessments from states with outstanding loans. More than half of the Credit Reduction states are expected to assess employers for interest in 2014.

Controlling UI Costs

State unemployment insurance remains the only payroll tax that employers can control by prudent human resource management and careful handling of UI claims. Employers’ state UI tax rates rise in direct proportion to unemployment claims of former workers. ADP can assist employers in managing UI claims and help to keep UI taxes as low as possible in this difficult environment.

ADP Compliance Resources

ADP maintains a staff of dedicated professionals who carefully monitor federal and state legislative and regulatory measures affecting human resource, payroll, tax and benefits administration, and help ensure that ADP systems are updated as relevant laws evolve. For the latest on how federal and state tax law changes may impact your business, visit the ADP Eye on Washington Web page located at www.adp.com/regulatorynews.

ADP is committed to assisting businesses with increased compliance requirements resulting from rapidly evolving legislation. Our goal is to minimize your administrative burden across the entire spectrum of payroll, tax, HR and benefits, so that you can focus on running your business. This information is provided as a courtesy to assist in your understanding of the impact of certain regulatory requirements and should not be construed as tax or legal advice. Such information is by nature subject to revision and may not be the most current information available. ADP encourages interested readers to consult with appropriate legal and/or tax advisors. Please be advised that calls to and from ADP may be monitored or recorded.

If you have any questions regarding our services, please call 1-800-CALL-ADP (1-800-225-5237).

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Last updated: November 15, 2013

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