When a state’s own UI funds are depleted, the state can borrow from the Federal Unemployment Account (FUTA), and if such loans are not repaid within two years that state is designated as a “credit reduction state”. When this “credit reduction” is applied, the FUTA tax typically increases by 0.3%, or $21 per employee. The tax credit continues to be reduced annually by 0.3% until loans are repaid. For 2015, California’s FUTA tax percentage is estimated at 2.4% – Credit Reduction State percentage to increase to 2.4% – both California and the Virgin Islands requested a waiver from the BCR Add-on tax for 2016, and the U.S. Department of Labor (DOL) granted the BCR waiver requests.

Use the calculator below to calculate the estimated effect of these 2016 FUTA Tax increases on your business:

Employers and business owners can do little to affect the outcome of state legislative actions. However, they can do a great deal to anticipate and prepare for the projected increases in FUTA tax costs. If you want to ensure that you are covered for the “worst case” situation – the possibility of being hit with an additional tax penalty in the form of the BCR add-on – you can increase your budgeted amount by an additional $105 per employee. This means factoring in a total of $126 in unemployment fund taxes for each person you employed in 2015.

And, while the additional penalty of the “Benefit Cost Ratio (BCR)” add-on tax may not be imposed, it would be prudent to plan for that possibility. At the very least you will have the funds to cover it and if it is not required, you will have a surplus to carry over for 2016 when the next FUTA credit reduction takes effect.