After years of recovery from the 2008 recession and year-over-year increases in FUTA taxes due from employers in California, it has finally happened: the state of California has finally met the requirements necessary to avoid FUTA credit reductions for 2018. The United States Department of Labor has published the official notice which you can view at https://oui.doleta.gov/unemploy/futa_credit.asp.
The net FUTA tax rate in California (after offset) for 2018 will go down from the 2017 rate of 2.70% (which includes the 2.10% credit reduction) to the regular 0.60% on the $7,000 taxable wage base. As a result, California employers will save $147 per employee in federal unemployment taxes in 2018 ($189 per employee in 2017 versus $42 per employee in 2018).
Thomas & Company first reported this anticipated reduction in May 2018 but now it is official.
This leaves the Virgin Islands as the only state unemployment agency with an outstanding Title XII debt and a FUTA tax that will continue to increase with the offset credit reductions that apply. The Virgin Islands net FUTA tax will be increased from 2.70% to 3.00% on the $7,000 taxable wage base. The 2018 tax per employee will now be much higher than any other state at approximately $210 per employee.
The significant reduction in FUTA taxes due on employers in California will provide relief in cash flow as employers pay 2018 FUTA taxes before January 31, 2019. However, it also means a significant loss in revenue to improve the California UI trust fund that remains at a level that is not sufficient to cover increased benefits that would be paid in an economic downturn.
As a reminder, FUTA credit reductions are imposed when the state UI trust fund borrows from the Federal Unemployment Account and does not repay the loan prior to November 10th in the second consecutive year, leaving an outstanding Title XII loan on January 1st.
As always, if there are any questions please do not hesitate to contact us.