Two states and one U.S. Territory have been assessed a Federal Unemployment Tax Act (FUTA) credit reduction for employers in 2023. This means that the usual credit against the full FUTA tax rate will be reduced, resulting in higher tax rates for employers who pay wages subject to unemployment insurance (UI).
For a second year in a row employers based in California and New York will face the impact of a FUTA credit reduction. For 2023 this will result in a FUTA credit reduction of 0.6% on wages paid to employees for work carried out in either of these states. This reduction will ultimately lead to employers paying an effective federal unemployment tax rate of 1.2%, which can cost up to $84 per employee when applied to the federal unemployment-taxable wage base of $7,000.
Employers in the US Virgin Islands will have to pay an effective federal unemployment tax rate of 4.5% on wages paid to employees for work in the territory. This is due to a general FUTA credit reduction of 3.9%. The reduction will be applied to the $7,000 wage base, meaning employers may have to pay up to $315 for each employee.
More about the FUTA Credit Reduction
If a state has an outstanding balance on their federal loans, which they use to pay unemployment benefits, they may be subject to a FUTA credit reduction. To repay the loan, the federal government decreases the credit given to that state and raises the net FUTA tax rate for employers. This is done to discourage states from borrowing from the federal government and encourage them to manage their unemployment insurance programs responsibly.
For more information on the FUTA Credit Reduction, please see IRS.gov.
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