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California FUTA Credit: What Employers Have to Pay

Due to its unpaid federal loans, the US Department of Labor has announced that California is the only state subject to a FUTA credit reduction this year.

This means that for-profit employers in California will have to pay an additional $168 per employee for 2016 to compensate for the state’s shortfall.

What Is FUTA?

FUTA stands for the Federal Unemployment Tax Act (FUTA). Along with state unemployment systems, FUTA provides unemployment compensation to workers that have lost their jobs. For-profit employers pay both federal and state unemployment taxes and only employers pay FUTA – it’s not deducted from the employee’s wages.

What Is the FUTA Credit?

The FUTA tax rate is 6.0% but employers receive an offsetting credit of 5.4% for your state’s payment of unemployment insurance. This makes the effective FUTA tax rate 0.6%, which applies to wages paid up to a limit of $7,000 per worker ($42 per employee per year).

However, when state unemployment insurance trust funds are depleted, as they are here in California, states draw from a designated federal loan account. If such loans are not repaid within two years, as is the case here, part of the 5.4% FUTA tax credit is incrementally reduced each year, leaving employers to make up the difference.

What California Employers Owe for 2016 & 2017

This will be the sixth consecutive year that California is in debt to FUTA. Each year that a balance is owed to FUTA, California employers pay a higher tax rate that goes to pay down the debt as well as interest on the outstanding debt.

According to CalChamber Advocacy, employers had to pay $126 per employee in 2014 because of the California FUTA credit (1.8% on a $7,000 tax base, which includes an additional 1.2% on top of the normal 0.6%). In 2015, California employers had to pay $147 per employee and are expected to pay $168 per employee for 2016.

This year’s employer payments are due January 31, 2017 with IRS FUTA tax return, Form 940. The final year of the California FUTA credit is 2017 when employers are expected to pay $189 per employee, so mark your calendar to send in that payment by January 31, 2018.Contact us to learn about the California FUTA credit and payroll, HR and HCM services

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