For the second year running, California is a credit reduction state.  This means “we” have taken loans from the federal government to meet state unemployment benefit liabilities and have not repaid those loans within the allowable time frame.   

The result of being an employer in a credit reduction state is higher tax due on the Form 940.  For the year ended December 31, 2012, the calculation results in $42 per employee as additional FUTA liability, bringing total FUTA tax per employee to $84 for the year.  The increased liability is considered incurred in the fourth quarter and is due by January 31 (with other annual payroll report filings).  For those filers that we process, explanation is provided with their reports.  Those who run reports off Quickbooks are often puzzled that the balance due with Form 940 is so much higher than last year.   Help them not to be puzzled.

As a practical matter, there is no predicting whether CA will be a credit reduction state again in 2013 (any bets  on whether “we” repay those loans in the coming months?). 

  •     In 2011, the credit reduction liability resulted in an additional $21 per employee. 
  •     For 2012, the hit is $42 per employee. 
  •     If assessed for 2013, it will be $63 per employee.   


Painful and may get more so. 
Bad State.

Written by Deborah Baggett- LinkedIn Profile