Employers In Three States To Pay Higher Unemployment Taxes In 2024
In November, the U.S. Department of Labor (DOL) announced the FUTA tax credit reduction states for the 2024 tax year. According to the IRS, a state is considered a credit reduction state if it has taken loans from the federal government to meet its state unemployment benefits liabilities and has not repaid the loans within the allowable time frame. For the 2024 tax year, these states are: California, New York, and the U.S. Virgin Islands. As a result, employers in these states will pay higher federal unemployment tax when they file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, for 2024.
What Is The FUTA Credit?
FUTA is the term used to refer to the Federal Unemployment Tax Act. The FUTA levies a federal tax on employers covered by a state’s unemployment insurance program. The standard FUTA tax rate is 6 percent of taxable wages paid to each employee up to $7,000 during the calendar year. The funds from the FUTA tax create the Unemployment Trust Fund. Employers that pay their state unemployment taxes in a timely manner receive a credit offset on Form 940 of up to 5.4 percent against the entity’s FUTA tax liability. When an employer receives the full FUTA credit of 5.4 percent, its net FUTA tax rate is 0.6 percent.
What Causes The FUTA Tax Credit Reduction?
If a state does not have adequate funds to pay unemployment benefits for the residents of its state, it may borrow funds from the Unemployment Trust Fund. However, if a state that has borrowed funds cannot pay back those funds timely, the FUTA credit is reduced, typically by 0.3 percent for each year the loan remains unpaid.
What Is The Impact On My 2024 FUTA Tax?
California and New York have had outstanding loan balances since 2021 and did not repay all their loans by Nov. 10, 2024. Therefore, employers in those states are subject to a 0.9 percent FUTA credit reduction for 2024. The FUTA tax rate for these employers will be 1.5 percent.
The U.S. Virgin Islands has had an outstanding loan balance since 2010. The credit reduction for 2024 will be 4.2 percent, so employers in the U.S. Virgin Islands will pay a FUTA tax rate of 4.8 percent. The additional taxes are reported on Schedule A of Form 940. The return is due Jan. 31, 2025.
If your company has employees in any of these jurisdictions, and you have questions about your FUTA tax liability, contact a member of GBQ’s employment tax team. Or click here to learn more about GBQ’s state and local tax services.
By Sara Goldhardt, CPA, director, state and local tax services.
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