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Companies in 13 states and the U.S. Virgin Islands will have to pay more in federal unemployment taxes for 2013, according to data released by the U.S. Department of Labor. And that may point to higher contingent labor costs in those states.
Employers in those states are losing a portion of their standard tax credit on the Federal Unemployment Tax Act (FUTA). The reduction comes because those states have unpaid balances on funds borrowed from the federal government to pay unemployment benefits.
The FUTA rate is 6.0 percent on the first $7,000 of wages. However, employers generally receive a credit of 5.4 percentage points, for an effective tax rate of 0.6 percent.
That FUTA credit is reduced by 0.3 percent-points when a state has two consecutive years of unpaid borrowings as of Jan. 1, and the full amount of the loans are not repaid by Nov. 10, according to the IRS. The credit is reduced again each following year until state borrowing is repaid. For example, employers in a state with outstanding loans after two years would have a federal tax credit of 5.1 percent instead of the standard 5.4 percent, thus raising the effective tax rate to 0.9 percent. The credit would be reduced to 4.8 percent if there are still funds that have not been paid back in the next year.
“Any increased FUTA tax liability due to a credit reduction is considered incurred in the fourth quarter and is due by Jan. 31 of the following year,” according to the IRS.
Here is a list of states and their reductions (click image to enlarge).