If you’ve ever witnessed a spike in Federal Unemployment Tax at the end of the year and wondered, “Why is this happening?!”, we are going to solve that mystery in this edition of “Ask the Expert”.
The 2018 Federal unemployment tax rate is 6% with a wage base of $7,000 per employee. Since most companies get a 5.4% credit at the end of the year for paying their state unemployment taxes correctly, a rate of 0.6% is used to calculate and pay the tax throughout the year (which can be seen on the “Payroll Summary” report in iSolved). If the IRS finds a company delinquent in their state unemployment taxes after the close of a year, they can require a company to pay more Federal unemployment tax through an additional assessment, but this is not the FUTA Credit Reduction.
The FUTA Credit Reduction is a result of a state having delinquent loans with the Federal Government that were issued to cover the state’s unemployment program. Sometimes states must take out loans to cover unemployment claims if the claims exceed the state funds. These loans come from the Federal Government and they give the states a specified time frame for repayment. If repayment is not completed in the designated time frame, then the Federal Government will start to recoup the funds through the FUTA Credit Reduction. How this works is at the end of every year the states are evaluated to see if they are in good standing. If they are not, the Federal Government decides the exact percentage the credit will be reduced and the reduction in credit means more taxes owed for the year. Companies operating in states with a FUTA credit reduction will see an increase in FUTA tax on the payrolls at the end of the year. A list of FUTA Credit Reduction states and rates will be issued in the coming weeks by the Federal Government. If you do have an applicable FUTA credit reduction, this will be listed clearly on the “Payroll Summary” report.
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