After facing escalating federal unemployment taxes for the past five years, Connecticut employers face an even larger FUTA increase as early as 2016 under a proposal from President Obama.
Normally, employers pay FUTA taxes at a rate of 6% of the first $7,000 of covered wages paid to each employee during a calendar year.
The rate is then offset by credits of up to 5.4% for amounts paid to a state unemployment fund. Thus, the usual amount paid by a business is 0.6%, or about $42 per employee.
But Connecticut is one of nine states that haven’t yet repaid the federal government for borrowing to shore up the state's Unemployment Compensation Trust Fund after the impact of the recession.
For each year a state fails to repay the debt, the amount of the credit reduction shrinks by 0.3%. After the fifth year of the debt, an additional 0.2% penalty is assessed.
As a result, instead of $42 per employee, Connecticut businesses had to pay 2.3%, or $161, per employee for the 2014 calendar year.
Now, President Obama is proposing to increase the effective FUTA tax rate from 0.6% to 0.8%, or $56 per employee, beginning in 2016.
His proposal also calls for a subsequent increase in 2017, equivalent to $70 per employee, and for additional automatic increases in years thereafter to coincide with increases in average wages.
Connecticut businesses were already bracing to pay higher FUTA taxes until the debt to the federal government is repaid, which is not projected to happen until 2017.
But the president’s proposed FUTA increases, on top of the scheduled 0.3% increases over the next few years as a result of the recession, will hit Connecticut businesses much harder than businesses in states that have repaid their federal loans.
This also is one more reason Connecticut businesses should contact CBIA to help support their efforts to make simple, cost-saving reforms to the state's unemployment compensation system that businesses in other states are already benefitting from.