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Federal Unemployment Tax (FUTA) Credit Reduction for Missouri in 2014 is 0.0%

Posted by robkraft on January 18, 2014

At the time this article was originally written, January 2014, a credit reduction was expected.  But Missouri managed to pay its debts to the Federal Government on time so the credit reduction was removed; or reduced to 0.0.  It appears that the credit reduction will be 0.0 in 2015 as well.

In 2014 the FUTA Credit Reduction in Missouri is increasing from .09 to .12.

Q. What does this mean for Missouri employers?

It means that you will pay a little bit more in FUTA (Federal Unemployment Taxes) to the federal government this year.

Q. What is going on and why did it increase?

Every year states borrow money from the federal government to pay unemployment to unemployment recipients.  If a state fails to repay all the money they borrow, then the state is subjected to a “credit reduction” the result of which is that employers in the state pay more unemployment tax to the federal government.

Q. How is an employer’s unemployment tax to the federal government calculated?

The federal unemployment tax rate is 6.0% for 2014, as it was in 2013.  Employers pay the tax on the first $7,000 of salary for each employee each calendar year.  This would come to $420 per employee each year.

However, since employers also pay an unemployment tax to the state, the federal government allows employers to deduct 5.4% from the 6.0%.  This 5.4% is a “credit”.  Thus the amount paid in unemployment tax to the federal government becomes $42 per employee each year.

However, employers may only deduct 5.4% when their state has paid all of its borrowed money back to the federal government.  When states have not repaid all the borrowed money, they are subjected to a reduction of this 5.4% credit and this is called the “credit reduction”.

Q. So how much will Missouri employers pay in federal unemployment taxes in 2014?

In Missouri, for 2014, the credit reduction is 1.2%.  So the 5.4% credit is reduced by 1.2% becoming a 4.2% credit.  Subtracting the 4.2% credit from the 6.0% federal unemployment tax rate gives us a result of 1.8% for the tax rate we pay to federal unemployment.  So in Missouri for 2014, the unemployment tax we pay to the federal government on the first $7,000 of salary is ($7,000 * 1.8% =) $126.00.

 Q. How does the federal government determine the amount of the credit reduction?

The first year that a state fails to repay the federal government the credit rate is .03%.  The rate increases by .03% every year until the state has fully repaid the federal government.  Since this is the 4th year that Missouri has been unable to repay all of the loans the rate is up to 1.2%.  About half of the states have been unable to repay their loans since the recession began (http://en.wikipedia.org/wiki/FUTA_credit_reduction).

IRS Documentation of FUTA taxes: http://www.irs.gov/pub/irs-pdf/i940.pdf

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