If your company currently employs anyone, you are legally required to have unemployment insurance. The goal of unemployment insurance is for the government to provide a baseline of income for people who have lost their job through no fault of their own. If an employee commits an act worth termination or the employee actually quits, they can’t receive the insurance. But if you let them go because you’re downsizing or pivoting, they can receive the benefit.
Unemployment insurance is legally mandated by the federal government and facilitated by the Federal Unemployment Tax Act (FUTA). FUTA makes it possible for the IRS to collect 6% of wages up to $7,000/year per worker. However, in practice, the federal government only collects 10% of that (or 0.6% of wages up to $7,000), due to something called state credits. State credits are in place to accommodate state unemployment insurance programs, known as SUI. Because of these credits, FUTA usually comes out to $42/employee per year to the federal government if the employee makes $7,000 or more in one year.
Credit reduction states
Credit reduction states are states that have borrowed from the federal government to pay unemployment benefits and have not repaid the loans within the allowed 2 year timeframe. Because of this effective debt that a state has with the federal government, the federal government will progressively decrease it’s credit to that state and charge the employers in that state more FUTA tax. The FUTA tax increases by 0.3%, or $21 per employee, for every year that this state remains delinquent.
For example, New York state was one of the credit reduction states in 2014. It had been delinquent in its payments for a while, which means that the businesses with employees in New York had to pay a FUTA tax of 1.8%, or $126 per employee, for 2014.
According to the Department of Labor, these are the states that owe additional FUTA for 2014:
For more information on FUTA and credit reductions, we recommend visiting the IRS guide here.
Paying FUTA and FUTA adjustments
Every employer must report FUTA tax by filing an annual Form 940 with the IRS. If you are currently using Justworks, we will file Form 940 for your organization, as well as automatically calculate and pay the additional FUTA tax due as a result of FUTA credit reductions. You will see this additional charge as an adjustment in your invoice history.
Our commitment to fee transparency
Part of Justworks’ service is to bill and remit payment for all federal, state and local government fees for your company and all your employees - regardless of where they reside. As part of this service we promise that:
- We will never mark up any fees or costs from federal, state or local governments or any third parties.
- We will charge fees as soon as we know about them.
- All fees will be viewable on your invoice history, with a label or explanation.
- These fees are not related to Justworks and are applicable to all businesses.
- You can always reach out to us at 1-888-534-1711 or firstname.lastname@example.org to ask any questions regarding your invoice.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.