Payroll Taxes on the Rise in Credit Reduction State

Even though the state of Indiana has been designated one of the best states for business regarding taxes, one area that doesn’t play out is with the FUTA. That’s the Federal Unemployment Tax Act. Employers pay a tax on employees’ wages to cover the state’s unemployment insurance program.

Indiana is one of several states in the position of having an outstanding loan to the federal government.  In fact, according to the Congressional Research Service report dated Sept. 20, 2012, Indiana owed the federal government $1,994,007,775.40. And that means the state is designated a FUTA Credit Reduction State.

FUTA tax in a Credit Reduction State

Being employers in a Credit Reduction State has consequences – that cost you money. Let me explain:

Generally, the FUTA tax rate is 6.0% on the first $7,000 of employee income. In most states, employers generally receive a credit of 5.4% making the tax amount employers would pay approximately 0.6%. However, if a state carries a loan balance for two consecutive years, the terms of the loan require that an additional FUTA tax be collected until the loan is paid back. The additional tax is an additional 0.3% each year. For Indiana employers, the additional tax amounts to an additional 1.8% for 2013.

And in 2014, it will rise again.

Effectively, the amount of credit to employers is reduced and they pay more – 0.3% more – every year – until the loan is repaid. There is nothing small business owners can do except increase the budget and prepare. If you are using a good payroll provider, like The Payroll Department, they will keep you up to date on the rates and help you plan accordingly.

The difference in the tax can be significant. In fact, it means that on $7,000, the additional 1.2% is $84. At first glance, that might not seem like a great deal more, but add it to the base rate of $42 and then multiply it times the number of employees on the payroll, and it adds up quickly, especially for growing small businesses working hard to create jobs in the workplace.

Payroll providers ease the pain

Payroll services don’t like to have to give entrepreneurs and business owners bad news, but here at The Payroll Department, Teresa Ray wants her clients to be aware and prepared. It’s enough of a strain to be thinking about benefits and health care for employees without finding yourself blindsided with additional payroll taxes at the end of the year. At least if you know it’s coming, well, you know it’s coming.

The only thing employers can do is urge the Indiana State Congress to repay the loans as quickly as possible.

Elaine of The Payroll Department Blog Team