tax increase

FRANKFORT, Ky. (1/30/13) - Since 2010, Kentucky employers have been hit with a 50% increase in Federal Unemployment Tax Act (FUTA) taxes.  The increase is because Kentucky has taken loans from the federal government to meet its state unemployment benefits liabilities and has not repaid the loans within the allowable time frames.  The effective FUTA rate has increased from .8 percent of the first $7,000 of wages paid to each employee ($56 each max) to 1.2 percent of first $7,000 wages paid ($84 each max).  For 2013 the tax will increase to 1.5 percent and continue to increase .3 percent each year until Kentucky’s Unemployment Trust Fund is back in the black.  When that happens, a 5.4% credit can be applied giving a .6% effective FUTA rate for Kentucky employers.  Unfortunately the feds have until November to decide what the rate for that year will be.  Employers should budget for the higher rate.

What is very confusing for Kentucky employers is that this is referred to as a “credit reduction”.  Each state operates under the FUTA rules and when states are in compliance with FUTA and owe no money, credits are given, therefore reducing the 6.0 percent FUTA tax.  Because the Kentucky Trust Fund was in the black and in compliance, credits reduced the effective rate to .8% for many years.  In 2010 the credit was increased to 5.4% leaving an effective .6% FUTA rate for employers.  Now, the credits for Kentucky are being taken back by the feds until the Trust Fund is restored.  Adding to the confusion is that the Social Security match paid by employers is 6.2%

Employers pay State Unemployment (SUTA) and FUTA taxes on what is called the “taxable base”.  The FUTA taxable base remains at $7,000; but, the SUTA base for Kentucky in 2012 increased to $9,000 from $8,000 where it had been for many years.  Furthermore, the taxable base will increase $300 each year until 2022.  So SUTA taxes increased 12.5 percent in 2012 and will increase 3.75% (calculated from $8,000) each year until 2022.  The total dollars increase for each employer varies based on that employer’s tax rate which is calculated on several variables including claims against that employers reserve account.

The SUTA rate changes are the result of a task force created by Governor Beshear in 2009 to address the huge shortfall in the trust fund.  The task force reported in January 2010 with 17 specific recommendations to return the fund to solvency.  Those recommendations were quickly addressed by the Kentucky General Assembly and signed into law by Governor Beshear.  

Ron Sanders
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Posted on 2/2/14
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