Federal Unemployment Tax Act (FUTA) Update

Date: January 21, 2015

The lingering effects of the Great Recession can still be
felt every year when your Federal Unemployment Tax Act (FUTA) tax bill comes
due. As you probably know, Indiana began borrowing from the federal government
to pay unemployment insurance (UI) benefits in November, 2008.

Two years later, Indiana
qualified as a “Credit Reduction State”, meaning the State had been borrowing
from the federal government to pay UI benefits for two consecutive years. By
2012, 25 states were borrowing from the federal government to pay unemployment
insurance benefits.  In order to pay the principal of the loan, FUTA tax
credits are decreased by the federal government, resulting in a tax increase to
employers.

The US Department of Labor
calculates FUTA taxes in the first quarter for the prior taxable year.  The FUTA tax is 6.0% of the first $7,000 in
wages paid to each employee but employers paying their taxes in-full and timely
receive a 5.4% credit. Therefore, in normal times, employers pay 0.6% in FUTA
taxes. As part of the terms of the loan, the federal government reduces
employer FUTA tax credits by 0.3% every year of borrowing. This calculation
began in 2010 for Indiana, payable in 2011. Employers made an additional
payment of $21 per employee in 2011, $42 the next year, and so on, until the repayment
of the entire loan occurs.

Indiana subsequently acted to
offset employer FUTA tax increases by changing state UI premium rates. As a
result, in 2011, half of Hoosier employers experienced a net decrease in
premiums, while the other half, who had a history of using the trust fund more,
paid higher rates. This, combined with closing many UI eligibility loopholes,
and the introduction of a fair weekly benefit calculation for UI recipients,
resulted in a balanced solution to bringing solvency to Indiana’s Trust Fund
and paying off the loan.

For the first time in over a
decade, Indiana began paying out less in benefits from the Trust Fund than
premiums paid in during 2012. Current Indiana Department of Workforce
Development projections show the federal government loan will be repaid by mid-2016.
If these projections hold true, there will be no additional FUTA payment in
2017. (Please refer to the payment schedule.)

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