Employers in some states will continue to face higher-than-expected payroll tax liabilities in 2014 as a result of reduced credits for state unemployment taxes.
Employers are subject to the Federal Unemployment Tax Act (FUTA) and pay 6 percent on the first $7,000 of covered wages paid to an employee during a calendar year. A credit for state unemployment taxes paid is available to offset up to 5.4 percent of the employer’s FUTA liability.
States encountering financial difficulty can borrow money from the federal government to cover their unemployment benefits, and many states took advantage of this borrowing opportunity during the fiscal crisis. However, employers in states that do not timely repay their loans are subject to a reduction in the FUTA credit, effectively increasing their payroll tax liabilities. The U.S. Department of Labor recently released a list of states and territories that have not repaid their loans and the corresponding credit reduction:
More information on the FUTA credit reduction is available on the IRS website.