FUTA Tax in California Going Down to 0.6% – Virgin Islands FUTA goes up again

Yes, it is official!!

After years of recovery from the 2008 recession and constantly increasing FUTA taxes due from employers in California, the state has finally met the key condition needed to avoid FUTA credit reductions: no outstanding Title XII loans.  On November 10^th , USDOL published the official notice. See also the spreadsheet “Final 2018 Federal Unemployment Tax Act (FUTA) Credit Reductions.”

California FUTA Tax Rate

The net FUTA tax rate in California (after offset) for 2018 will go down from the 2017 rate of 2.7% (which includes the 2.1% credit reduction) to the regular 0.6% on $7,000 base (a reduction from $189 per employee to $42 per employee).

Some employers may have already anticipated the reduction in budgeting but now it is official.

The significant reduction in FUTA taxes due on employers in California will provide relief in cash flow as employers pay 2018 FUTA taxes before January 31, 2019. However, it also means a significant loss in revenue to improve the California UI trust fund that remains at a level that is not sufficient to cover increased benefits that would be paid in an economic downturn.

Virgin Islands FUTA Tax Rate

This leaves only the Virgin Islands with an outstanding Title XII debt and a FUTA tax that will continue to increase with the offset credit reductions that apply. The VI net FUTA tax will be increased from 2.7% to 3.0% on the $7,000 tax base. The 2018 VI tax per employee will now be much higher than any other state at approximately $210 per employee.

Experience Rating

UWC recognizes the benefit of experience rating in the determination of UI contributions to be paid by employers and favors state determined experience rates over the federally determined flat non-experience rates that are imposed when the state UI trust fund borrows from the Federal Unemployment Account and does not repay the loan prior to November 10^th in the second consecutive year having an outstanding Title XII loan on January 1st.

A careful review of the status of the California UI trust fund, projected tax and benefits, and the impact of potential recessions should be performed now to avoid a repeat of the experience post the 2008 recession.