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Tax Byte

Potential Increase in Federal Unemployment Tax for Ohio Employers

Ohio is among 17 states who currently havean outstanding federal unemployment insurance (UI) loan that has been outstanding for at least two years. Unless Ohio pays off its loanby November 10, 2013, Ohio employerswill pay moreon their 2013 federal unemployment (FUTA) tax returns.

Here's how it works: currently all employers in the United States payFUTA tax at a rate of 6.0% on the first $7,000 of covered wages paid to each employee (full time or part time) during a calendar year, for a maximum of $420 per each employee. This tax is designed to help the states fund their unemployment benefits. This tax rate has historically beenreduced by credits of up to 5.4%, leaving anet FUTA tax rate is 0.6%,or $42 per employee.Quite abit lower thanks to the credits. This has beenthe federal unemployment tax that Ohio employers have paid to the federal government for many years prior to 2012.

However,Title XII of the Social Security Act allows states with financial difficulties to borrow funds from the federal government to pay unemployment benefits.Ohio is one of many states that did this to fund thelarge unemploymentclaims caused by the recent recession. Until thestatesrepaythese loan, the normal credit of 5.4%available to employersin those state is reduced. This loss of crediteffectively increases the employer's FUTA tax rate by 0.3% beginning with the second consecutive January 1 in which the loan isn't repaid, then an additional 0.3% annually thereafter. So the .6% net ratebecomes .9%, then 1.2%, then 1.5%....you get the idea.

Ohio has until November 10, 2013 to repay its outstanding loans or elsethis will be thethird year it has loans outstanding. The FUTA rate for Ohio employers will increase from the federal base rate of .6% to 1.5%. The tax will increase from the$42 per employeemaximumto$105 per employee. Employers willpay this additional amountwhen they file their2013 Form 940in January 2014.

In January 2013 Ohio employers paid a FUTA rate of 1.2% because Ohio's unemployment loans had not been paid. Employers who made tax deposits during the year using the base rate of .6% (which was most of them) still had balances due when they filed in January. This year may be same, except instead of owing an additional $42 per employee, Ohio employers will owe up to an additional $63 per employee. We will keep you posted on the status of Ohio's loan repayments, but we wanted to give you heads up as early as possible. As always, please contact us if you have any questions.

Cathy Gierhart, EA

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