December 6, 2022

Federal Unemployment Tax Increasing in New York State and Others

On November 10, 2022, the United States Department of Labor announced that California, Connecticut, Illinois and New York will be credit reduction states for purposes of 2022 FUTA payments.  This means that these states have taken loans from the federal government to meet the unemployment benefits obligations and have not repaid the loans within the allowable time frame.  As a result, the usual credit against the full FUTA tax rate is reduced and an additional FUTA tax of .3% will be due for employers in these states.

A state is a credit reduction state if it has taken loans from the federal government to meet its state unemployment benefits liabilities and has not repaid the loans within the allowable time frame. Employers in credit reduction states will owe a greater amount of FUTA for 2022.

The standard FUTA tax rate is 6.0% on the first $7,000 of wages per employee. Generally, employers receive a credit of 5.4% when they file their Federal Form 940 “Employer’s Annual Federal Unemployment Tax Return,” which results in a net FUTA tax  rate of 0.6% (6.0%-5.4% = 0.6%).

The 2022 FUTA credit reduction is 0.3% for the four impacted states noted above. While an employer would typically owe FUTA of $42 per employee who earned at least $7,000 of wages during the year ($7,000 X [6.0% – 5.4%]); an employer in a credit reduction state for 2022 will instead owe $63 of FUTA per employee with earnings of at least $7,000 in 2022 ($7,000 X [6.0% – 5.1%]). As shown in the example, the FUTA credit reduction is reduced by 0.3% from 5.4% to 5.1%. The end result is an increase in FUTA owed of $21 per employee with at least $7,000 of wages earned in 2022. Employers will calculate and report their 2022 FUTA on Schedule A of Form 940 filed in January 2023.

For additional information, contact Heritage Tax at (207) 888-8800.