The US Department of Labor issued notice that employers in California and the Virgin Islands will pay their FUTA taxes for calendar year 2016 at a higher federal unemployment (FUTA) tax rate than employers in other states because the state and territory failed to repay their outstanding federal UI loans by November 10, 2016.

This is down from the three states and the Virgin Islands that had credit reductions for calendar year 2015.

The increased 2016 FUTA taxes are due from employers with their fourth quarter 2016 federal unemployment tax deposit, due January 31, 2017.

California and the Virgin Islands again received waiver of BCR for 2016

California, Ohio (which repaid its loan prior to September 1, 2016) and the Virgin Islands requested a waiver of the additional Benefit Cost Rate (BCR) for 2016 and were approved.

Background

The Social Security Act requires a reduction in the FUTA tax credit to start when a state has outstanding federal loans on January 1 of two consecutive years. The reduction in the FUTA tax credit is 0.3% for the first year and an additional 0.3% (or more) for each succeeding year until the loan is repaid.

Federal law discourages states from carrying their loan balances over several years by further reducing the FUTA credit beginning in the fifth year of the loan. This add-on to the FUTA credit reduction is referred to as the Benefit Cost Rate (BCR).

The BCR triggered on this year for the states that began borrowing in 2009 and still had an UI loan balance as of January 1, 2016. The BCR penalty may be waived if the state's governor submits an application to the US Secretary of Labor no later July 1 of the penalty year; and the state takes no action (legislative, judicial, or administrative) during the 12-month period ending September 30 that would reduce UI trust fund solvency during that same time period. Should the BCR add-on be waived, as is normally the case if the conditions are met, another penalty, referred to as the 2.7 add-on, can kick in if the state's average UI tax rate is inadequate — this penalty rate cannot be avoided or waived if triggered on.

Details for 2016

For 2016, three states and the Virgin Islands faced a potential FUTA credit reduction because there was an outstanding loan balance as of January 1, 2016. Connecticut and Ohio repaid their outstanding advances before November 10, 2016, thereby eliminating any FUTA credit reduction for 2016.

California and the Virgin Islands began borrowing in 2009 and had outstanding loan balances on January 1 in each of the years of 2011 through 2016. As a result and because a loan balance continued as of November 10, 2016, California and the Virgin Islands have a 1.8% credit reduction for 2016, for a total FUTA rate of 2.4%.

No state or territory for 2016 faced the special 2.7 add-on for having an average state UI rate that is lower than allowed under federal law (as the Virgin Islands did for 2012-2013).

2016 Form 940 and Schedule A should soon be released

The final version of the 2016 Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, and Form 940, Schedule A, Multi-state Employer and Credit Reduction Information, should soon be released by the Internal Revenue Service.

For more information on FUTA taxes, see the US Department of Labor website.

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