Federal Tax Hike Due to $10+ Billion State UI Debt
Since January 1, California employers have been paying higher taxes because the state has not repaid money it borrowed from the federal government to pay unemployment insurance (UI) benefits.
Unless Congress takes action (which it is not expected to do), the higher tax will remain in effect through 2012 and then increase each year the state has an outstanding loan balance. California’s UI Trust Fund has been insolvent since 2009. By the end of 2012, the UI Fund deficit is projected to reach $10.7 billion, according to the California Employment Development Department (EDD).
Employers will lose 0.3% of their federal tax credit, partially offset by the end of a 0.2% surcharge in July 2011. The 0.3% tax credit translates into approximately $21 per year for any employee who makes $7,000 or more in 2012. California employers pay UI taxes on the first $7,000 of wages per employee.
Statewide, the tax increase totals an estimated $289.8 million in 2012 and $615.7 million in 2013, according to the EDD October 2011 Unemployment Insurance Fund Forecast. This represents a loss of 0.6% of the tax credit in 2012, EDD reports. The additional taxes paid will help offset California’s federal loan balance.
Federal Loan Outstanding Impacts EmployersState laws must meet certain federal requirements for employers to qualify for credits against the tax imposed under the Federal Unemployment Tax Act (FUTA). Due to California’s outstanding loan balances, the U.S. Department of Labor notified the Internal Revenue Service (IRS) and EDD late last year that California is a “credit reduction state.”
Employers subject to unemployment tax laws of a credit reduction state must pay additional federal unemployment tax when filing a Form 940, according to the IRS website.
California has carried an outstanding loan balance since 2009. Therefore, the FUTA credit for California employers decreased from 5.4% to 5.1% on January 1, 2012, a 0.3% credit reduction, according to the EDD website. Employers will use IRS Schedule A (Form 940), Part 2, to calculate the FUTA tax, EDD reports.
State UI Fund Insolvent
The unemployment rate in California has been consistently higher than the U.S. rate for some time. California’s UI Trust Fund has been insolvent since January 2009 due in part to the large numbers of unemployed Californians. Also contributing to the UI fund’s insolvency has been legislation that imposed benefit increases in 2001 without including cost-saving reforms.
EDD has advised employers with questions on the FUTA credit reduction, Form 940 or Publication 15 (2011) (Circular E) Employer’s Tax Guide to contact the IRS at http://www.irs.gov.
Please contact the Santa Clara Chamber of Commerce if you should have any additional questions on how these increased taxes may impact your business.