According to the California EDD, “The UI Fund deficit was $1.1 billion at the end of 2017. In 2018, for the first time since 2008, the Fund is expected to end the year with a positive balance, estimated at $2.1 billion. The Fund is forecast to increase to $2.6 billion by the end of 2019, however, if changes are not made to the current financing structure, the UI Fund may not maintain a balance high enough to withstand an economic downturn.”
The EDD goes on to say of employers, “Currently, employers remain on the “F” contribution rate schedule in 2017, plus a 15 percent surcharge. Employers are projected to be on this same schedule throughout the forecast period and beyond if changes are not made to the financing structure.”
That’s the latest and Datatech encourages you to read the entire forecast document and speak to your accountant with any questions concerning the FUI credit reduction tax.
Reported 12.27.2017 – In May of 2017, the EDD released a forecast for the Unemployment Fund that projected California being able to repay the remaining balance owed to the Federal government for UI loans by November 2018. This would mean that California employers will not have to pay the increased “credit reduction” tax when they file their Form 940 for 2018.
The forecast is available here.
The EDD forecasted the loan balance for the end of 2017 at $1.4 billion. The Department of Labor currently shows $1.064 billion as a balance, so California actually did better than expected in paying off the loan.
California employers will still need to pay the credit reduction tax of 2.1% on the first $7,000 of wages for each employee on their Form 940 for 2017.
Since the credit reduction tax went into effect, we have increased the credit reduction tax rate each year by 0.3% for each state that was projected to not have their loans paid off. Because California is expected to exit credit reduction status for 2018, the state tax rate file will not include a credit reduction tax rate.
It is important to note that the final decision on whether or not California employers will be subject to the credit reduction tax is not made until November 2018 by the Department of Labor. This decision is based on whether or not California has paid off their loans.
If the basis for the EDD’s forecast (economic conditions, expected UI tax receipts, expected UI benefit payments) turn out to be wrong, it is possible that California employers could still be subject to the credit reduction tax.
Impact for Farm Labor Contractors
Farm labor contractors that have included the credit reduction tax in their calculations for their overhead may be able to eliminate this tax when they negotiate contracts with their growers. Depending on the language in your contract, you may need to adjust the commission rates you bill your growers.
Because the 2018 tax rate file will not include a credit reduction tax rate, farm labor contractors that itemize taxes on their invoices and include the credit reduction tax rate in the FUI tax overhead item will immediately see the rate billed drop to the 0.6% FUI rate when 2018 rates go into effect.
If for some reason you want to continue billing and accruing the credit reduction tax, you can edit the state tax rate file and enter a rate for the FUI Credit Reduction.
What If California Doesn’t Exit Credit Reduction Status?
The additional credit reduction tax is due with your 4th quarter FUI payment. Some customers have been accruing the credit reduction tax during the year and depositing the additional tax when they make their regular FUI tax deposits. This way, they do not need to make a big payment at the end of the year. Since the 2018 state tax rate file will not include a credit reduction rate, no additional FUI tax will be accrued unless you change the rate yourself.
If California does not exit credit reduction status, you will still owe the credit reduction tax whether or not you accrued the tax during the year or (in the case of a labor contractor) whether or not you billed your growers a high enough rate to cover the additional tax.
Once the remaining loan balance is paid off, it will provide some certainty about the status of the FUI credit reduction tax. If the EDD or Department of Labor announces that the loan has been paid, we will notify our customers in a future blog post.
Check with your accountant if you have questions about the FUI credit reduction tax.