Recently, the U.S. Department of Labor announced that California and the Virgin Islands are subject to the 2016 FUTA credit reduction. The Federal Unemployment Tax Act or Federal Unemployment Trust Account(FUTA) is the law that structures the details on how states will operate their unemployment benefit programs. Employers who have paid more than $1,500 in wages in the last two years, or have had an employee in 20 different weeks of the year are responsible for paying FUTA tax. These guidelines for employers who are subject to the FUTA tax and are operating in the state of California means that all employers in the restaurant and hospitality industry will be affected. California employers are subject to an additional 1.8% FUTA tax for 2016.
In California, this year will be the 6th year in a row that the state is in debt to the FUTA. The credit reduction is activated when a state or territory defaults on the Federal Unemployment Insurance Loan. This increases the FUTA tax that employers in that particular state pay on an individual employee. Every year that a balance is owed to FUTA, California employers pay a higher tax that goes to pay down the debt for the Federal Unemployment Insurance Loan. The state must pay interest on the outstanding debt. FUTA taxes are due on January 31st The additional tax will calculate at 1.8% on the first $7,000 of each employee’s taxable wages. Employers may owe up to an additional $126.00 per employee.
California’s current FUIL insolvency is caused by significant unemployment rates and FUIL benefit increases that started in 2001. In 2012, California was at an all-time high debt to the federal trust fund at $10.2 billion. By the end of 2017, California can expect the debt to go down to approximately $2 billion. But there is hopeful news for the future. If California’s economy continues to improve as anticipated while producing sufficient FUTA to pay for ongoing benefits, the principal debt will be paid off in 2018. Then the FUTA offset credit will be fully restored to employers.
California FUTA Credit Reduction
Payroll companies are handling the California FUTA credit reduction for 2016 in various ways. Heartland sent out an email to clients in the beginning of December stating, as part of their tax services, they will calculate and collect this tax direct from the bank with December payroll and remit on behalf of their clients. Paylocity will send out information in regards to the California FUTA credit reduction in January. Paychex, with their additional TaxPay Payroll Tax Service, will manage payroll tax obligations. Without the TaxPay Payroll Tax service, the responsibility of the various calculations and submissions will fall to the employer. ADP recently sent out an email in regards to the California FUTA 2016 credit reduction. If ADP is responsible for filing the IRS Form 940, they will automatically calculate and pay the additional FUTA tax. Invoices will be received by mid-January 2017 to advise employers of any applicable and additional liabilities and credit reduction amounts.
For additional information or specifics in regards to FUTA credit reductions, please contact your payroll representative. For assistance or guidance with taxes, please contact KROST, CPAs. For more information on FUTA, please visit: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/FUTA-Credit-Reduction
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