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Because California has relied on federal loans to pay regular Unemployment Insurance (UI) benefits and has not repaid the loans, California employers will see another increase in their FUTA taxes in January 2016 for wages paid to their workers in 2015. California employers will be subject to a 1.5% credit reduction on their 2015 FUTA tax returns (a maximum $105 increase per employee) because of the state’s failure to repay its outstanding federal loans for five consecutive years. Only three other states are also subject to the credit reduction.
Under title XII of the Social Security Act, states can borrow funds from the federal government to pay unemployment benefits. The same provision provides that the federal government can recover the funds by reducing the FUTA credit it gives to employers. When a state has an outstanding loan balance on January 1 for two consecutive years, and the loan is not repaid by November 10 of the second year, the state FUTA credit is reduced until the loan is repaid. California has not repaid its loan, so employers will pay more federal FUTA taxes.
The reduction is 0.3% for the first year and an additional 0.3% for each succeeding year until the loan is repaid. From the third year onward, there may be additional reductions in the credit, although California has received waivers from these additional reductions. California is now in its fifth year of credit reduction.
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