NJ, NY and DE Employers Hit with FUTA Tax Credit Reduction, PA avoids tax increase

November 26th, 2012 by Noam Yalon

While Congress debates how to stave off the fiscal cliff, New Jersey, New York, Delaware and 15 other states are suddenly facing higher payroll taxes. Under the provisions of the Federal Unemployment Tax Act (FUTA), a Federal tax is levied on employers covered by the Unemployment Insurance (UI) program at a current rate of 6.0% on wages up to $7,000 a year paid to an employee. The law provides for a credit against that tax liability of up to 5.4% to employers who pay state taxes timely under an approved state UI program. In states meeting the specified requirements such as New Jersey, New York, Delaware and Pennsylvania employers pay an effective Federal tax of 0.6%, or a maximum of $42 per covered employee, per year.

The credit against the federal tax may be reduced if the state has an outstanding UI loan. Since the recession many states have lacked the funds to pay unemployment insurance benefits and have exercised their ability to obtain loans from the federal government. To assure that the states repay these loans, the federal government partially recovers those monies by reducing the FUTA credit it gives to employers, which is the equivalent of an overall increase in the FUTA tax. When a state has an outstanding loan balance on Jan. 1 for two consecutive years and does not repay the full amount of the loan by Nov. 10 of the second year, the federal government will reduce the FUTA credit until the state repays the loan. The reduction schedule is 0.3 percent for the first year and an additional 0.3 percent for each succeeding year until the loan is repaid. Delaware is in the first of year of the reduction schedule so the credit reduction is 0.3 percent retroactive to the beginning of 2012. New Jersey and New York are in the second year of the reduction schedule so the credit reduction is 0.6 percent retroactive to the beginning of 2012. Pennsylvania was one of 5 states that was able to pay its loan balance during 2012 and is no longer a credit reduction state.

Meanwhile many states, including New Jersey, are imposing increased rates, interest assessments, higher wage bases or surcharges at the state tax level in an attempt to make their plans solvent. Please contact us if you have any questions.

StateWage BaseFuta RateCredit ReductionEffective Futa RateMaximum Annual Tax
Arizona$7,000 0.60%0.30%0.90%$63
Arkansas$7,000 0.60%0.60%1.20%$84
California$7,000 0.60%0.60%1.20%$84
Connecticut$7,000 0.60%0.60%1.20%$84
Delaware$7,000 0.60%0.30%0.90%$63
Florida$7,000 0.60%0.60%1.20%$84
Georgia$7,000 0.60%0.60%1.20%$84
Indiana$7,000 0.60%0.90%1.50%$105
Kentucky$7,000 0.60%0.60%1.20%$84
Missouri$7,000 0.60%0.60%1.20%$84
North Carolina$7,000 0.60%0.60%1.20%$84
New Jersey$7,000 0.60%0.60%1.20%$84
Nevada$7,000 0.60%0.60%1.20%$84
New York$7,000 0.60%0.60%1.20%$84
Ohio$7,000 0.60%0.60%1.20%$84
Rhode Island$7,000 0.60%0.60%1.20%$84
Vermont$7,000 0.60%0.30%0.90%$63
Wisconsin$7,000 0.60%0.60%1.20%$84

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