Employers in the U.S. Virgin Islands and 17 states may not be eligible to claim the maximum amount of state unemployment tax credits on their 2013 federal unemployment tax return, as their respective jurisdiciton has had an outstanding federal unemployment insurance loan for at least two years.
Employers pay FUTA tax at a rate of 6.0 percent on the first $7,000 of covered wages paid to each employee during a calendar year, regardless of when those wages were earned. This tax may be offset by credits of up to 5.4 percent (known as the "normal credit" and "additional credit") against their FUTA tax liability for amounts paid to a state or territorial unemployment insurance fund by January 31 of the subsequent year.
The net FUTA tax rate for most employers is 0.6 percent (i.e., 6.0 percent − 5.4 percent).
Under Title XII of the Social Security Act, jurisdictions with financial difficulties can borrow funds from the federal government to pay unemployment insurance benefits. If a jurisdiction defaults on its repayment of the loan, the amount of state unemployment insurance tax credits that employers in the jurisdiciton may claim is reduced. Employers in credit reduction jurisdictions pay FUTA tax at a 0.3 percent rate higher than other employers, beginning with the second consecutive January 1 in which the loan is not repaid by November 10 of that year. For each succeeding year in which there is a balance, the credit is further reduced by an additional 0.3 percent.
The U.S. Virgin Islands will be credit reduction states in 2013, unless they repay their outstanding federal UI loans by Nov. 10, 2013, because, according to the Department of Labor, the U.S. territory had an outstanding federal UI loan for at least two years. Also included in credit reduction jurisdictions for 2013 are Arizona, Arkansas, California, Connecticut, Delaware, Georgia, Indiana, Kentucky, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Rhode Island, South Carolina, and Wisconsin. A few states (e.g., Arkansas and Wisconsin) have already announced that they will be credit reduction states in 2013.
Employers in the U.S. Virgin Islands face a possible 0.9 percent credit reduction on their 2013 FUTA tax returns (maximum $63 increase per employee) because of the Territory’s failure to repay its outstanding federal loans for four consecutive years. The 2013 FUTA tax rate for employers in the U.S. Virgin Islands could even be higher in 2013 than noted above if the Territory is subject to the Benefit Cost Ratio add-on. The BCR add-on goes into effect beginning with the fifth taxable year of any succeeding consecutive January 1st that there is a balance due on the federal unemployment insurance loan. The tax is a complicated calculation that compares the average unemployment benefits that have been paid to the tax effort in the Territory. If the tax effort has not met a certain level, the BCR add-on is imposed. The U.S. Virgin Islands was subject to the BCR add-on in 2012.