Your State’s Unemployment Rate Impacts Your Payroll Taxes

As an employer, you have to pay federal unemployment tax (FUTA) in addition to your state unemployment tax. The federal tax is figured on the first $7,000 of wages for each employee. The FUTA tax rate is 6%. This rate is reduced by a tax credit for state unemployment insurance.

The credit rate for state unemployment insurance normally is 5.4%. However, if states borrowed money from the federal government to pay their unemployment claims and have failed to repay the money, then employers in those states (called “credit reduction states”) have a reduced credit.

Technically states have until November 10 to repay their loans, but as it stands now, employers in 26 states are looking at additional FUTA taxes.

  • Employers in Indiana and South Carolina could have a credit of only 4.5% (a credit reduction of 0.9%), resulting in $63 additional FUTA tax for each employee
  • Employers in Alabama, Arkansas, California, Connecticut, Florida, Georgia, Illinois, Kentucky, Minnesota, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, Virginia, and Wisconsin could have a credit of only 4.8% (a credit reduction of 0.6%), resulting in $42 additional FUTA tax for each employee
  • Employers in Arizona, Colorado, Delaware, Kansas, and Vermont could have a credit of only 5.1% (a credit reduction of 0.3%), resulting in $21 additional FUTA tax for each employee

On a per-employee basis, the additional tax isn’t much. But the principle of the higher tax is significant. You — the employer — are penalized because your state has not been able to manage its finances well enough to avoid borrowing or repaying loans on time. It is likely you are based in a state with a high unemployment rate. And there’s nothing you can do about it (other than relocating).

The Department of Labor determines which states are credit reduction states; the IRS posts these states and the amount of the credit reduction late in the year. For 2011, for example, there were 21 credit reduction states, with credit reductions ranging from 0.3% to 0.9%.

I’ll be on the lookout for the final tally of credit reduction states for 2012.

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