Notice the line on your Federal Unemployment Tax (FUTA) return for 2011 entitled the Credit Reduction, although not a new line item, it now comes into play for California employers. It is an additional FUTA tax passed on to the employer because California is one of the twenty states to be deemed a Credit Reduction State.

“Credit Reduction State” is a state that has not repaid money it borrowed from the federal government to pay unemployment benefits and has carried an outstanding federal loan balance for two consecutive years.

The determination comes from the Department of Labor. All employers in these states that pay wages that are subject to unemployment tax laws must pay 0.3 percent additional federal unemployment tax when filing their 2011 940 FUTA return. In place for 2012, as well, and due to California owing $9.2 billion, as of November 14, 2011 and according to Cal-Tax Association is estimated to be close to $10.7 billion by the end of 2012, will most likely continue for years to come. Probably, it is no surprise that California has the highest debt of all states. FUTA is paid at a rate of 6.0 percent on the first $7,000 of wages paid per employee by the employer, not the employee, to benefit the states unemployment fund. Employers usually get a credit of 5.4 percent for paying on time, but the Credit Reduction Act reduced that to 5.1 percent increasing the amount each employer pays.

Estimates are that employers will pay an additional $21 per employee, not a huge amount, but regardless another tax burden upon the employers struggling in a tough economy. Certainly it is not an incentive to hire.

What is California doing about reducing the unemployment in our state? The job market is tough and for the majority beating the pavement they have a rough road, however many of us know at least one person collecting unemployment whom has no intention of seeking a job, sitting waiting for the job fairy to drop one in their lap, or have just plain given up. Continued and increasing over regulation and lack of incentive to hire doesn’t ease the situation, nor provide jobs.

California’s solution is to continue to extend unemployment benefits and borrow from the feds to fund at the expense of California employers. It is no wonder California employer’s talk of leaving California, but they need to check carefully, nineteen other states are following California down the path of employer burden.