California Employers Continue to Pay Higher Federal Unemployment Tax


This article is reproduced with permission from Spidell Publishing, Inc.

Because California has relied on federal loans to pay regular Unemployment Insurance (UI) benefits and has not repaid the loans, California employers saw another increase in their federal unemployment taxes in January 2018 for wages paid to their workers in 2017.

California employers were subject to a 2.1% credit reduction on their 2017 federal unemployment tax return (a maximum $147 increase per employee) because of the state’s failure to repay its outstanding federal loans for seven consecutive years. Currently, the only other jurisdiction also subject to the credit reduction is the Virgin Islands.

Credit reduction

The standard Federal Unemployment Tax Act (FUTA) rate is 6.0%, but generally employers with a good claim rate history receive a 5.4% credit against the 6.0% rate. However, this credit is reduced in states that have an outstanding loan balance with the federal government. 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 borrowed funds from the federal government in 2009, but because California has not repaid its loan, California employers 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 seventh year of credit reduction for a total reduction of 2.1%.

Loan to be paid off

It is anticipated that California will pay off its loan in 2018. Should that occur, employers will see their FUTA rate reduction go from 2.1% to 0.06% next year. If that does not occur, California’s rate reduction will increase to 2.4%, or an additional $21 per employee.

For more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES (844.494.6337).

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