Federal Unemployment Tax Act (FUTA) Tax Increases on Wages Employers Paid in 2013

Because the state has relied on a federal loan to pay regular Unemployment Insurance (UI) benefits for more than two straight years, California employers will see an increase in their FUTA taxes in January 2014 for wages paid to their workers in 2013.

Tax Changes and Information

The demand for unemployment benefits was unprecedented through the course of the long and difficult recession and the state’s UI Trust Fund continues to have a deficit of more than $9 billion. The continuing federal loan has helped cover the cost of regular unemployment benefits.

California employers fund regular benefits through contributions to the state’s UI Trust Fund on behalf of each employee, and they pay separate FUTA taxes to the federal government to help pay for the administration of the UI program.Those FUTA contributions also pay for UI loans to insolvent states, and federal extension benefits. Any additional employer FUTA contributions are used to help repay the state’s federal UI loan.

Current federal law provides employers with a 5.4 percent FUTA tax credit. However, due to California’s outstanding federal loan, this credit was reduced to 5.1 percent for the 2011 tax year and 4.8 percent for the 2012 tax year. The credit will be reduced by another 0.3 percent to 4.5 percent for the 2013 tax year due to the outstanding federal loan. This has resulted in an overall increase in the FUTA taxes California employers’ pay of up to $63 more per employee for the 2013 tax year.

Without any change in the state’s UI funding by the State Legislature, FUTA costs for California employers are anticipated to increase by an additional 0.3 percent each year until the UI Trust Fund regains solvency.

Additional Information

If you have questions on the FUTA credit reduction, Form 940, or Publication 15(2011) (Circular E) Employer’s Tax Guide, please visit the FUTA Credit Reduction page on the IRS website.

 

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