If you have employees in New York and/or California, then you need to know about some important changes to your federal unemployment taxes for 2023.
Please read on to understand what this means for your business, how MegaPay will deduct the taxes, and where you can find how much you owe for this year.
During COVID, a number of states took a loan from the federal government to meet their state unemployment benefits liabilities. This was due to the large number of people unemployed or furloughed, as well as the decision to allow furloughed people to claim unemployment benefits.
Understand that these were loans, not grants, and needed to be repaid. New York and California did not repay the loans on time and are now subject to a reduction in FUTA credits for 2023.
The federal unemployment tax rate is typically 6 percent. However, nobody pays this in full because as long as you pay your state taxes on time (which MegaPay helps to ensure), you receive a credit of 5.4%. This means you end up only pay 0.6%.
This helps make unemployment tax affordable for businesses across the country. The tax rate applies to the first $7,000 paid to each employee as wages (not including tips or commissions).
However, because New York and California did not repay their loans from COVID, they are considered credit reduction states for 2023.
If you are operating in California or New York, or have remote employees in those states, then your FUTA credit will be reduced by 0.6% to help the state repay its loans. This means you will be left to pay double than what you typically do: 0.6% to 1.2%.
Please note, this is not your fault but unfortunately, there's no way to escape the additional tax liability. If you have employees in multiple states, it applies only to employees based in California or New York. The amount per employee remains small, but it can add up if you have a lot of employees.
This increased liability will be charged in January, when the fourth quarter tax adjustments are calculated. You will be charged this tax for the entire year as one lump sum. The short notice is due to the fact that the credit reduction only came into effect when a loan deadline was missed in November.
States routinely take out loans and are not always able to pay them back, so FUTA credit reductions can potentially happen in other states in the future.
MegaPay has setup our system to automatically deduct the extra tax for our clients in New York and California. To find the amount that will be automatically deducted, you can find your taxable wages in MegaPay by running a report.
The report is Z Taxable Wages For Payroll by Ck Date (5236). Run this report by group type as summary. The amount you need to pay will show up as ER FUI.
This only applies to employers in New York and California and will be a one time thing for 2023, not a long-term change. Your account will be debited on the normal date for fourth quarter tax adjustments
You don't need to do anything else; we will take care of this for you and ensure that you have paid your full tax liability.
If you have any specific questions regarding this, please reach out to your MegaPay rep or contact us here!