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Ace Payroll Blog


Nov 20 2014

FUTA Credit Reduction

By: Craig Rogers

Posted in: Payroll Taxes


As if it isn't hard enough to run a business and afford the expenses of running a business, the Internal Revenue Service has announced its 2014 Futa Credit Reduction states. What is a credit reduction you ask, well simply put, if a state has borrowed funds from the Federal government to meet its unemployment liabilities and has an outstanding loan balance for two consecutive years, the 5.4% credit the state normally gets is reduced to help pay back the loan. The reduction schedule is 0.3% for the first year the state is a credit reduction state, another 0.3% for the second year, and an additional 0.3% for each year thereafter that the state has not repaid its loan in full.  Additional offset credit reductions may apply to a state beginning with the third and fifth taxable years if a loan balance is still outstanding and certain criteria are not met. The credit reduction states for 2014 are:

California 1.2%

Connecticut 1.7%

Indiana 1.5%

Kentucky 1.2%

New York 1.2%

North Carolina 1.2%

Ohio 1.2%

Virgin Islands 1.2%


Since Unemployment is an employer tax, each company doing business in one of the above states is being charged extra to help its state pay back the Federal Government. An example of how costly this can be is, suppose you have a company in New York, under normal circumstances you would pay a maximum a $42.00 per employee for Federal Unemployment tax. But being in a 1.2% Credit reduction state, the employer would now pay a up to a maximum of $126.00. This equates to a business having to pay an additional $84.00 per employee! Multiply the additional $84.00 by the number of employees a business has, and its easy to see why so many companies are finding it difficult to turn a profit.


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