The United States Department of Labor has confirmed that employers in the U.S. Virgin Islands are to pay higher payroll costs for 2020 because of a Federal Unemployment Tax Act credit reduction.
A FUTA credit reduction is to apply to the U.S. Virgin Islands because the jurisdiction had a loan balance from the federal unemployment account and was assessed a credit reduction for 2019.
For 2020, employers in the U.S. Virgin Islands are to be assessed a general FUTA credit reduction of 3% on wages paid to employees for work attributed to the jurisdiction.
The reduction is to cause employers to pay an effective federal unemployment tax rate of 3.60%, or up to $252 for each employee when applied to the federal unemployment taxable wage base of $7,000. This is impactful because the standard effective tax rate is 0.60%, or up to $42 per employee, because the maximum credit that may be applied to federal unemployment tax generally is 5.40%.
An additional credit reduction, the benefit-cost rate (BCR) add-on, could have been in effect for the U.S. Virgin Islands for 2020, but the US DOL approved the jurisdiction’s application for relief from the add-on. Approval of the relief allowed employers in the U.S. Virgin Islands to avoid a BCR add-on of 0.70%, a cost of up to $49 for each employee.
The credit reduction percentages are to be reaffirmed by the Internal Revenue Service on the 2020 Form 940 Schedule A, Multi-State Employer and Credit Reduction Information. Additional amounts due because of 2020 credit reductions are to be paid by February 1, 2021, which also is the due date for the 2020 Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.
Potential Future Credit Reductions
Many states have borrowed federal funds to pay for the surge in unemployment benefit claims caused by the COVID-19 pandemic, but the federal unemployment tax impact may be delayed until 2022.
Twenty states have loan balances that did not have balances at the start of 2020, according to the Treasury Department’s Bureau of the Fiscal Service. The states are California, Colorado, Connecticut, Delaware, Georgia, Hawaii, Illinois, Indiana, Kentucky, Louisiana, Massachusetts, Minnesota, New Jersey, New Mexico, New York, Ohio, Pennsylvania, Texas, Virginia, and West Virginia.
Maryland is authorized to borrow funds but does not have a balance.
For a state to be assessed a FUTA credit reduction, it must have a balance from the federal unemployment tax account on January 1st of two consecutive years and on November 10th of the year that the reduction would be assessed.
States that started borrowing in 2020 would be assessed a credit reduction of 0.30% for 2022 if balances remain January 1, 2021; January 1, 2022; and November 10, 2022, with the additional amounts due January 31, 2023. The credit reductions would raise federal unemployment tax costs per employee to $63 from $42 for employers in affected states.
Wage Bases Change for 2021
Modifications to unemployment taxable wage bases for 2021 have been acknowledged by 11 states thus far.
Wage bases are to increase in Arkansas, Iowa, Montana, Nevada, New Jersey, New York, Oklahoma, Washington, and Wyoming. Wage bases are to decrease in Missouri and Vermont.
Washington’s 2021 wage base, $56,500, is to be the highest unemployment wage base ever implemented.
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