The Federal Unemployment Tax Act (FUTA) is a critical federal payroll tax funding unemployment programs. In 2023, businesses, especially in California, New York, and the Virgin Islands, need to be particularly cautious as they will face increased FUTA tax expenses.
While all businesses meeting certain criteria are subject to FUTA tax, those in California, New York, and the Virgin Islands need to pay special attention. These regions are facing a FUTA credit reduction, leading to higher tax liabilities compared to other states.
The standard FUTA tax rate is 6.0% of the first $7,000 of each employee's annual wages. Typically, a 5.4% credit reduces this to 0.6%. However, businesses in California, New York, and the Virgin Islands won't receive the full credit due to outstanding federal loans. This means a higher effective FUTA tax rate for employers in these regions.
Employers must use the Electronic Federal Tax Payment System (EFTPS) for FUTA tax payments. Those in California, New York, and the Virgin Islands should prepare for higher payments due to the credit reduction and ensure compliance to avoid penalties.
Securing the full 5.4% FUTA tax credit is typically crucial for cost control. However, for 2023, businesses in California, New York, and the Virgin Islands face a reduced credit—0.6% for California and New York, and a substantial 3.9% for the Virgin Islands. This reduction significantly increases FUTA tax expenses in these areas.