2016 FUTA Credit Reductions

November 11, 2016

The federal unemployment tax, also known as the FUTA tax, pays unemployment compensation to workers who lose their jobs. Employers report and pay FUTA taxes separately from Social Security, Medicare and withheld income taxes. Employees do not pay this tax or have it withheld from their pay—it is exclusively paid by employers.

Employers pay FUTA taxes on the first $7,000 of each employee’s annual wages at a rate of 6.0%. Employers who pay their state unemployment taxes on time receive a credit reduction of 5.4%, making the net rate 0.6%. However, if a state has outstanding federal loans for two consecutive Januarys, this credit of 5.4% will be reduced by 0.3% the first year and an additional 0.3% for each year after until the loan is repaid. The cost of repaying the state’s loan is passed to employers as part of their FUTA tax liability.

California at 1.8% is the only U.S. state that has an outstanding loan from the federal government and did not qualify for credit reduction avoidance. Since these loans were not repaid by November 10, 2016, employers in those states will be subject to a FUTA credit reduction.

Paycor will recover the FUTA amounts due by processing a one-time adjustment run for each client affected by this change. Affected clients will be notified by email or letter with the amount of debit and date of debit from their bank account.

If you have further questions, please contact your Paycor specialist.

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