Employers in 15 states (and the Virgin Islands) may not be eligible to claim the maximum amount of state unemployment tax credits on their 2014 federal unemployment (FUTA) tax return because their state has had an outstanding federal unemployment insurance (UI) loan for at least two years.

Employers pay FUTA tax at a rate of 6.0% on the first $7,000 of covered wages paid to each employee during a calendar year, regardless of when those wages were earned. This tax may be offset by credits of up to 5.4% (known as the “normal credit” and “additional credit”) against their FUTA tax liability for amounts paid to a state UI fund by January 31 of the subsequent year. The net FUTA tax rate for most employers is 0.6% (i.e., 6.0% − 5.4%).

Under Title XII of the Social Security Act, states with financial difficulties can borrow funds from the federal government to pay UI benefits. If a state defaults on its repayment of the loan, the amount of state UI tax credits that employers in the state may claim is reduced. Employers in credit reduction states pay FUTA tax at a 0.3% rate higher than other employers, beginning with the second consecutive January 1 in which the loan is not repaid by November 10 of that year. For each succeeding year in which there is a balance, the credit is further reduced by an additional 0.3%.

Under Code Sec. 3302(g), provided that certain requirements are met, a state with an outstanding loan under Title XII may repay any advances using its unemployment trust fund account in lieu of having the credit reduction rules apply to its employers.

Even
higher FUTA credit reduction rates.  The 2014 FUTA tax rate
for employers in Arkansas, California, Connecticut, Georgia, Indiana, Kentucky,
Missouri, New Jersey, New York, North Carolina, Ohio, Rhode Island, South
Carolina, Wisconsin and the Virgin Islands could even be higher in 2014 than
noted above if these jurisdictions are subject to the Benefit Cost Ratio (BCR)
add-on. The BCR add-on goes into effect beginning with the fifth tax year of
any succeeding consecutive January 1st that there is a balance due on the
federal UI loan. The tax is a complicated calculation that compares the average
unemployment benefits that have been paid to the tax effort in the state. If
the tax effort has not met a certain level, the BCR add-on is imposed. The
Virgin Islands was subject to the BCR add-on in 2012 and 2013.