(December 5, 2011) Absent an act of Congress, California employers will be paying higher taxes starting January 1, 2012 because the state has not repaid money it borrowed from the federal government to pay unemployment insurance (UI) benefits.
The tax increase amounts to $21 per year for any employee who makes $7,000 or more in 2012. California employers pay UI taxes on the first $7,000 of wages per employee.
Statewide, the tax increase amounts to an estimated $289.8 million in 2012 and $615.7 million in 2013, according to the California Employment Development Department (EDD) October 2011 Unemployment Insurance Fund Forecast.
This represents a loss of 0.3% of the federal tax credit in 2011 and 0.6% in 2012. These additional taxes paid will offset California’s federal loan balance.
State laws must meet certain federal requirements for employers to qualify for credits against the tax imposed under the Federal Unemployment Tax Act (FUTA).
Due to California’s outstanding loan balances, the U.S. Department of Labor has notified the Internal Revenue Service and the EDD that California is a “credit reduction state.”
Employers subject to unemployment tax laws of a credit reduction state must pay additional federal unemployment tax when filing a Form 940, according to the IRS website.
California has carried an outstanding loan balance for two years in a row.
Therefore, the FUTA credit for California employers will decrease from 5.4% to 5.1% on January 1, 2012, a 0.3% credit reduction, according to the EDD website Employers will use IRS Schedule A (Form 940), Part 2, to calculate the FUTA tax, EDD reports.
State UI Fund Insolvency
The unemployment rate in California has been consistently higher than the U.S. rate for some time. October unemployment in California was 11.7% versus 9% for the United States, according to EDD. The October unemployment rate was a slight drop from the 11.9% EDD reported for September, and an improvement from the 12.5% rate recorded in October 2010.
California’s UI Trust Fund has been insolvent since January 2009 due in part to the large numbers of unemployed Californians.
Also contributing to the UI fund’s insolvency has been legislation that imposed benefit increases in 2001 without including cost-saving reforms.
EDD is advising employers with questions on the FUTA credit reduction, Form 940 or Publication 15 (2011) (Circular E) Employer’s Tax Guide to contact the IRS at www.irs.gov.
Staff Contact: Marti Fisher