Employers in 17 states (and the Virgin Islands) may not be eligible to claim the maximum amount of state unemployment tax credits on their 2013 federal unemployment tax return, because their state has had an outstanding federal unemployment insurance loan for at least two years, according to tax analysts at Thomson Reuters Checkpoint.

Employers pay FUTA tax at a rate of 6.0 percent on the first $7,000 of covered wages paid to each employee during a calendar year, regardless of when those wages were earned. This tax may be offset by credits of up to 5.4 percent (known as the "normal credit" and "additional credit") against their FUTA tax liability for amounts paid to a state UI fund by January 31 of the subsequent year.

The net FUTA tax rate for most employers is 0.6 percent (i.e., 6.0 percent − 5.4 percent).
Under Title XII of the Social Security Act, states with financial difficulties can borrow funds from the federal government to pay UI benefits. If a state defaults on its repayment of the loan, the amount of state UI tax credits that employers in the state may claim is reduced. Employers in credit reduction states pay FUTA tax at a 0.3 percent rate higher than other employers, beginning with the second consecutive January 1 in which the loan is not repaid by November 10 of that year. For each succeeding year in which there is a balance, the credit is further reduced by an additional 0.3 percent.

The following states (and the Virgin Islands) will be credit reduction states in 2013, unless they repay their outstanding federal UI loans by Nov. 10, 2013, because, according to the Department of Labor, they have had an outstanding federal UI loan for at least two years: Arizona, Arkansas, California, Connecticut, Delaware, Georgia, Indiana, Kentucky, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Rhode Island, South Carolina, and Wisconsin. A few states (e.g., Arkansas and Wisconsin) have already announced that they will be credit reduction states in 2013.

Employers in Arizona and Delaware face a possible 0.6 percent credit reduction on their 2013 FUTA tax return (maximum $42 increase per employee) because of their state's failure to repay its outstanding federal loans for three consecutive years.

Employers in Arkansas, California, Connecticut, Georgia, Kentucky, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Rhode Island, and Wisconsin face a possible 0.9 percent credit reduction on their 2013 FUTA tax return (maximum $63 increase per employee) because of their state's failure to repay its outstanding federal loans for four consecutive years.

Employers in the Virgin Islands face a possible 0.9 percent credit reduction on their 2013 FUTA tax returns (maximum $63 increase per employee) because of the state's failure to repay its outstanding federal loans for four consecutive years. Employers in Indiana and South Carolina face a possible 1.2 percent credit reduction on their 2013 FUTA tax returns (maximum $84 increase per employee) because of their state's failure to repay its outstanding federal loans for five consecutive years. However, South Carolina has made a $144 million early payment toward its outstanding federal UI insurance loan and plans to make an additional $50 million payment in September. South Carolina took steps to avoid becoming a FUTA tax credit reduction state in 2012 and expects to continue to avoid such a reduction in 2013 as it continues to repay its loan.

The 2013 FUTA tax rate for employers in Indiana, South Carolina and the Virgin Islands could even be higher in 2013 than noted above if these jurisdictions are subject to the Benefit Cost Ratio add-on. The BCR add-on goes into effect beginning with the fifth taxable year of any succeeding consecutive January 1st that there is a balance due on the federal UI loan. The tax is a complicated calculation that compares the average unemployment benefits that have been paid to the tax effort in the state. If the tax effort has not met a certain level, the BCR add-on is imposed. The Virgin Islands was subject to the BCR add-on in 2012. Indiana and South Carolina have indicated that they will take steps to avoid being subject to the add-on. Florida and Vermont recently repaid their outstanding federal UI loans. As a result, the net FUTA tax rate for employers in these states will be 0.6 percent (i.e., the rate for employers that are not in credit reduction states).