When the high unemployment rates started because of the pandemic, it caused several states to borrow from the federal unemployment account to supplement their shortages. The federal government says that those affected states have until November 10, 2022, to repay those loans.
There are nine states affected in total: California, Colorado, Pennsylvania, Connecticut, Illinois, Massachusetts, Minnesota. New Jersey, and New York.
Employers in the nine states mentioned above face a possibility of having an uptick in their 2022 FUTA. States that have outstanding loans with the Fed that are not paid off by November 10, 2022 will be in what is known as FUTA credit reduction.
The full FUTA rate is six percent with a 5.4% credit given in normal circumstances for a net rate of .6%. Each year, a state has unpaid loans as of November 10, that credit is reduced by .3%, thus driving up the net FUTA rate by .3%. Therefore, in the first year, the net FUTA rate would go from .6% to .9%, which is in effect, a 50% uptick.
Part of the issue is that it is not known until November. Your payroll company always calculates FUTA at the normal net rate of .6%. If after November a state is considered to be in credit reduction, that is not calculated until the end of the year and there could be a big additional liability coming to the client all at once, versus having it spread throughout the year.
The increase in remote working has brought some hiring challenges and tax issues that shouldn’t be overlooked. Forty-nine percent of employers were required to file in at least one new state, with eight percent filing in at least 11 states. It makes it complicated to know which state’s law covers those employees for unemployment tax purposes.
State unemployment tax covered is determined by the following test:
These conditions are in descending order of priority. When a condition can decide the state where the employee is covered, the other conditions that follow do not need to be considered. However, because the localization of services according to this four-part-test, it may not help decide the state of coverage when an employee is dividing up time evenly between two states. Deciding the base of operation could also be a gray area for many.
Source:
https://news.bloombergtax.com/payroll/futa-credit-reductions-pose-potential-threat-for-2022
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