Monday, December 5, 2016

California, Virgin Islands Face FUTA Credit Reduction

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PNN: FUTA Credit

According to the U.S. Department of Labor (DOL), California and the U.S. Virgin Islands will lose the full Federal Unemployment Tax Act (FUTA) credit for 2016. This is because its federal loans were not paid for by the November 10, 2016, deadline. The credit reduction amount for each is 1.8%.

Federal Form 940, Schedule A, Will Reflect Reductions
The additional FUTA tax must be deposited by the due date of the 2016 federal Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, which is due January 31, 2017. The 2016 Schedule A (Form 940) will contain the official list of credit reduction states, and the credit reduction total from Schedule A is reported on Form 940. Both forms will be available on the Internal Revenue Service website when they are finalized.

Credit Reductions Because of State Loans
Under the joint federal/state UI system, states with a high rate of unemployment and difficulty meeting their benefit obligations can borrow money from the Federal Unemployment Account (FUA) to pay benefits. If states have loan balances on January 1 of at least two consecutive years and on November 10 of the second year, the FUTA credits for employers in those states are reduced with the extra FUTA tax paid being applied against each state’s loan balance.

A state with an outstanding loan can avoid a credit reduction for its employers by repaying all outstanding loans by November 10 of the year the reduction is scheduled to take effect. If the loan is not repaid by that date, a credit reduction of 0.3% goes into effect with employers in that state having their maximum credit reduced to 5.1% (5.4% - 0.3%).

For each additional year that the loan remains unpaid, an additional credit reduction of 0.3% is taken. California and the Virgin Islands each had a credit reduction in the past five years (2011-2015) and therefore have a credit reduction of 1.8% for 2016.

Take a Webinar to Learn More
On December 8, the APA will present a 90-minute webinar, Preparing Form 940 with Credit Reduction States, to guide payroll professionals through the changes for 2016. The webinar will also be available on demand after December 22.