Federal Unemployment Tax Act (FUTA) Tax Increases on Wages Employers Paid in 2017
California employers fund regular Unemployment Insurance (UI) benefits through contributions to the state’s UI Trust Fund on behalf of each employee. They also pay separate FUTA taxes to the federal government to help pay for the administration of the UI program, 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.
The demand for UI benefits was unprecedented during the recession and the state’s UI Trust Fund continues to have a deficit of approximately $1.25 billion (as of February, 2, 2018). The continuing federal loan has helped cover the cost of regular unemployment benefits. Because the state has relied on a federal loan to pay regular UI benefits for more than two straight years, California employers will continue to see an increase in their FUTA taxes in January 2018 for wages paid to their workers in 2017.
Tax Changes and Information
Current federal law provides employers with a 5.4 percent FUTA tax credit. However, due to California’s outstanding federal loan, the FUTA tax credit was reduced to:
- 5.1 percent for the 2011 tax year
- 4.8 percent for the 2012 tax year
- 4.5 percent for the 2013 tax year
- 4.2 percent for the 2014 tax year
- 3.9 percent for the 2015 tax year
- 3.6 percent for the 2016 tax year
The FUTA tax credit is 3.3 percent for the 2017 tax year due to the outstanding federal loan balance, bringing California’s total 2017 FUTA credit reduction to 2.1 percent. As a result, California employers will pay up to $147 more per employee for the 2017 tax year.
It is estimated that California’s UI Trust Fund will become solvent in 2018. If the fund is solvent, FUTA tax credit reductions will cease and California employers will receive the full FUTA tax credit.
California’s Credit Reduction Waiver Granted
On June 30, 2017, Governor Jerry Brown submitted an application to the United States Secretary of Labor requesting a waiver for any potential credit reduction “benefit cost ratio (BCR) add-on." It was determined on November 13, 2017, that California did not owe an additional credit reduction due to the BCR add-on. As a result, the 2017 FUTA credit reduction remains at 2.1 percent.
If you have questions on the FUTA credit reduction, Form 940, or Publication 15 (2017) (Circular E) Employer’s Tax Guide, visit the FUTA Credit Reduction page on the IRS website.