The federal unemployment tax rate for employers has become a moving target, making budgeting for this expense more difficult. Your FUTA tax payments for 2021 are not a good predictor of your 2022 liability, which will be higher for most multi-state companies.
The problem is that federal loans to the state UI trust funds can cause the net FUTA tax rate to increase for employers in the borrowing states. The increases are in annual increments of 0.30% (on a $7,000 taxable wage base). Such an increase is referred to as a “credit reduction” because the 5.40% credit for state UI taxes paid is reduced.
The “normal” net FUTA tax rate of 0.60% (0.80% prior to July 1, 2011) is arrived at by subtracting the 5.40% credit for state UI taxes paid from the gross FUTA tax rate of 6.00%. Given enough time, the credit reductions could theoretically cause an employer’s net FUTA tax rate to increase from 0.60% all the way to 6.00% as the credit is gradually reduced to zero. The tax revenue generated by the credit reductions is credited to the state’s UI trust fund and reduces the state’s loan balance.
A credit reduction can be removed for a given calendar year if a state repays its outstanding long-term loan by November 10 of that calendar year. A credit reduction can also be avoided for a calendar year (as in South Carolina in 2011) if a state takes certain actions to restore the solvency of its UI trust fund. Further, a credit reduction can be capped (at no less than 0.60%) if certain conditions are met.
As of March 5, 2021, nineteen state unemployment insurance trust funds (plus the Virgin Islands) had outstanding federal loans that remain unpaid under Title XII of the Social Security Act. The total amount outstanding is $51.22 billion. See the link to the US Treasury website at Government – Title XII Advance Activities Schedule (treasurydirect.gov).
Employers in the following states and jurisdictions are at risk of increasing FUTA taxes as early as 2022:
*The Virgin Islands have been subject to FUTA credit reductions for several years now
Because these states had an outstanding balance as of January 1, 2021 employers with employment in the states may be subject to an increase in Federal Unemployment Tax for 2022 if a loan amount remains outstanding as of January 1, 2022 and is not repaid in full by November 10, 2022.
Interest on Title XII loans was waived through December of 2020 under temporary law pursuant to the Families First Coronavirus Response Act of 2020 and the waiver was extended through March 14, 2021 by the Consolidated Appropriations Act of 2021. Unless there is further federal legislation extending the waiver, states will be obligated to pay the interest from sources other than regular employer UI contributions. States should budget for payment of this interest from other sources.
The budgeting problem is exacerbated by the fact that state UI agencies have until November 10 to repay their long-term loan and avoid a credit reduction for the calendar year in which the loan balance is repaid. No official notification of credit reductions is provided until after November 10. By that time employers have already submitted three quarterly FUTA deposits. Any shortfall must be paid with the final deposit for the calendar year (due January 31 of the succeeding year).
As we progress through 2021, the best budgeting tool available is located at https://oui.doleta.gov/unemploy/futa_credit.asp. The chart available is updated regularly but you should bear in mind that one or more of the nineteen at-risk states (plus the Virgin Islands) may repay their loan or qualify for a credit reduction avoidance.
We will continuously monitor this situation throughout the year and provide regular updates as they become available. As always, if there are any questions please do not hesitate to contact us or visit our website at www.thomas-and-company.com.