A US Department of Labor (USDOL) representative today confirmed that only the Virgin Islands has a federal unemployment tax (FUTA) credit reduction for calendar year 2018. Virgin Islands' employers will pay FUTA taxes for calendar year 2018 at a net rate of 3.0%, composed of a FUTA credit reduction rate of 2.4% and the 0.6% minimum FUTA rate. (Email response to inquiry, US Department of Labor website.)

Employers in the Virgin Islands will pay their FUTA taxes for calendar year 2018 at a higher FUTA tax rate than employers in other jurisdictions because it failed to repay its outstanding federal UI loans by November 10, 2018. These additional FUTA taxes are used to pay down Virgin Islands' federal unemployment loan.

The increased 2018 FUTA taxes are due from Virgin Islands employers with their fourth quarter 2018 federal unemployment tax deposit, due January 31, 2019.

California repaid its loan, avoiding a FUTA credit reduction for 2018

As we previously reported, California repaid its federal loan balance earlier this year, avoiding a FUTA credit reduction for 2018. California faced a potential FUTA credit reduction for 2018 because there was an outstanding loan balance as of January 1, 2018. (EY Payroll Newsflash Vol. 19, #087, 5-16-2018; California Employer Newsletter, third quarter 2018.)

Virgin Islands again received waiver of the BCR for 2018

As has been the case for the past several years, the territory's request for waiver of the Benefit Cost Rate (BCR) for 2018 was approved, removing an additional potential credit reduction of 1.3%. Had the request not been approved, Virgin Islands' employers would have paid 2018 FUTA taxes at a rate of 4.8%. (See EY Payroll Newsflash Vol. 19, #159, 10-4-2018, for more details.)

Background

The Social Security Act requires a reduction in the FUTA tax credit when a jurisdiction has an outstanding federal unemployment insurance loan balance on January 1 of the second consecutive year. 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 federal unemployment insurance 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 again this year for the Virgin Islands, which began borrowing in 2009 and still had a federal unemployment insurance loan balance as of January 1, 2018. The BCR penalty may be waived if the jurisdiction's governor submits an application to the US Secretary of Labor no later July 1 of the penalty year; and the jurisdiction takes no action (legislative, judicial, or administrative) during the 12-month period ending September 30 that would reduce unemployment insurance 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 apply if the jurisdiction's average unemployment insurance tax rate is inadequate — this penalty rate cannot be avoided or waived once activated.

As of November 8, 2018, the Department shows the Virgin Islands' outstanding UI loan balance was $68,494,355.

The standard FUTA credit reduction and BCR add-on rate are shown on the following chart.

2018 FUTA credit reduction states and rates

Legend

¹ BCR courtesy of U.S. Department of Labor. The 2.7 add-on could have applied since the BCR add-on was waived; however, this was not the case for 2018.

² California repaid its federal loan balance earlier in 2018 and expects to continue to be solvent.

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