Payroll in Practice: 11.25.2024

Question: Which states and territories will pay additional unemployment taxes in 2024, and how is it calculated?

Answer: On Nov. 12, the Labor Department announced that New York, California, and the US Virgin Islands are in credit reduction status for 2024. Employers in those states will not receive full credit for state unemployment taxes they paid when they file their 2024 Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.

The FUTA tax rate is 6% but employers are generally allowed a normal credit against the tax for amounts paid to a state unemployment fund. The maximum normal credit is 90% of the FUTA tax rate, which equals 5.4%.

Unless an employer is a new employer assigned an initial rate by a state, it generally will have a tax rate based on the amount of unemployment benefits collected by its former employees. If the employer’s experience rate is less than 5.4%, the employer may receive an additional credit for the difference between the employer’s actual state unemployment payments and the amount the employer would have owed if its state tax rate was 5.4%.

In most states, both the normal and additional tax credits apply, so most employers receive a 5.4% tax credit against their federal unemployment taxes regardless of their state tax rate.

The credit is reduced for wages that are not subject to state unemployment insurance tax or for failure to pay required state taxes before the due date for filing Form 940. The FUTA credit is also reduced for SUI taxes paid to credit reduction states.

Funding for the unemployment system comes from two sources: FUTA taxes and SUI taxes. FUTA taxes pay for the administration of the federal and state unemployment programs. SUI taxes fund benefits paid to workers. When a state unemployment system runs out of funds to pay benefits, the state may obtain loans from the federal government to pay the benefits.

If a state has outstanding balances from such loans on Jan. 1 for two consecutive years and does not fully repay the loans by Nov. 10 of the second year, the FUTA credit rate for employers in that state is reduced by 0.3 percentage points each year until the loans are fully repaid.

California and New York are now in their third year of credit reduction status. Their credit reduction is 0.9% from the standard 5.4% leaving a credit of 4.5% against the 6% FUTA tax.

Connecticut carried a balance on its unemployment loans on Jan. 1 of 2023 and 2024 but avoided a credit reduction by paying off the loans before Nov. 10. It will be at risk of a credit reduction next year if it borrows again and has a balance on Jan. 1, 2025.

The US Virgin Islands had its first credit reduction in 2011 and is currently in its 14th consecutive credit year. Its credit reduction rate for 2024 is 4.2%, which means its employers will be able to claim a 1.2% credit against the 6% FUTA tax instead of the normal 5.4% credit.

Form 940 computes the FUTA tax before any adjustments on Line 8 by multiplying the FUTA taxable wages by 0.6% to allow for the maximum 5.4% credit.

The credit reduction computed on Form 940’s Schedule A, Multi-State Employer and Credit Reduction Information, is based on only those FUTA taxable wages subject to SUI tax for the given state. The credit reduction does not apply to wages that are not subject to SUI or are more than the FUTA wage base of $7,000. The credit reduction amount is added to the FUTA tax liability on Line 11 of Form 940.

If an employer’s FUTA wages are excluded from SUI tax, the employer adds the entire 5.4% credit back on Line 9 of Form 940. However, if some of the employer’s FUTA wages are not subject to SUI tax or if required SUI taxes were not paid or were paid late, the FUTA credit adjustments are computed using the worksheet in the Form 940 instructions and are added to the FUTA tax on Line 10 of Form 940.

The adjustment for the credit reduction and the adjustment for wages exempt from SUI tax are separate, and neither affects the other.

This column does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., or its owners.

Author Information
Patrick Haggerty is the owner of a tax practice in Chapel Hill, North Carolina, and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

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