Illinois employers who pay quarterly taxes for federal unemployment insurance will notice a significant increase in the tax when they file fourth quarter returns for 2022. Illinois is one of four states and a territory being penalized for not repaying loans in a timely manner after taking advances from the federal government to meet their state unemployment benefit liabilities.
Besides Illinois employers, those in California, Connecticut, New York and the U.S. Virgin Islands will be hit with higher taxes under the Federal Unemployment Tax Act (FUTA) starting with quarterly payroll tax returns filed after December 2, 2022.
Federal Unemployment Tax Act
The FUTA is an employer paid tax that provides unemployment compensation to workers who have lost their jobs.
The standard FUTA tax rate is 6% on the first $7,000 of wages. Generally, employers receive a credit of 5.4% for timely FUTA payments. Hence, the discounted FUTA tax rate is 0.6%, which totals $42 in FUTA tax per employee, annually.
The states, including Illinois, involved in this credit reduction received advances from the federal government to meet their state unemployment benefits liabilities but have not repaid the loans within the allowable time frame. As a result, the federal government is reducing the FUTA credit normally given to employers.
Additional $21 in FUTA Tax Per Employee
This will result in additional tax due with employers’ Q4 2022 FUTA payments. The FUTA tax liability will increase by 0.3% for Illinois, California, Connecticut and New York, and 3.6% for the U.S. Virgin Islands. This amounts to approximately an additional $21 per full-time employee – roughly a 50% increase.
How to Prepare
Employers who use a payroll service provider will find that fourth quarter payroll will include the calculation and collection of the additional FUTA tax due. The FUTA credit and additional tax and impound amount will appear on fourth quarter payroll reports and annual form 940 provided by your payroll service provider.
Schedule A (Form 940) will display the annual FUTA tax for states that have a credit reduction on wages subject to the unemployment compensation laws. The total will display in Part 3, Line 11 of the 940 Form.
If your company has state unemployment insurance (SUI) exemptions, you may be liable for the additional FUTA. Common scenarios are listed below.
- Businesses with all employees exempt to state unemployment (SUI).
- Businesses with a combination of employees that are contributed for state unemployment as well as exempt to state unemployment.
- Businesses that paid state unemployment tax late may be liable for additional FUTA tax, up to the max 6% rate. Payroll service provider will calculate that all state unemployment tax was paid on time.
If you have questions about your additional FUTA tax liability, contact your KRD advisor.
