Indiana Loan Repayment Means Big Savings for Businesses

Indiana businesses have reason to rejoice. Governor Mike Pence announced that the state will pay off a federal loan early, saving employers $327 million in taxes.

The state began borrowing from the Federal Unemployment Account (FUA) in December 2008 to pay unemployment benefits after its own funds had been drained. When a state borrows from FUA, they have two years to repay the loan. If they don’t, the employers of that state are subject to a credit reduction. Stated another way, it is a reduction to the credit they would have normally received when paying their Employer’s Annual Federal Unemployment (FUTA) tax.

The FUTA tax rate is 6.0%, however, employers may receive a credit of 5.4% when filing their Form 940. For Indiana employers, that credit has decreased by 0.3% for each year past the repayment deadline. For 2015, the credit reduction would have been a minimum of 1.8%, costing employers $327 million in additional tax payable in January 2016 with the filing of Form 940. The lost credit equaled an additional $21 in taxes per employee in 2011, skyrocketing to $126 per employee in January of 2016 if not paid off prior.

Governor Pence has announced his intention to pay off the loan by borrowing from Indiana’s recent budget surplus, which reached $210 million at the end of Indiana’s fiscal year last June. The state would then get that money back by the end of the 2016 fiscal year from regularly collected employer payments to the state’s unemployment fund.

If the Governor pays off the loan by November 10, 2015, employers will not be subject to the additional tax. Instead of $327 million leaving Indiana borders into the federal government, the savings would remain in Indiana's growing economy. That’s a savings of $12,600 in FUTA taxes for an employer with 100 workers.

In a statement, Governor Pence said:
“By advancing funds to the Department of Workforce Development to pay off the outstanding loan to our unemployment trust fund, Indiana is demonstrating the importance of growing and maintaining economic achievement in our state. Removing this tax penalty for employers frees up resources that can be invested in hiring new employees, growing existing companies, raising wages, and more, and I’m confident that by removing this financial impediment to hiring, Hoosiers will continue to see economic opportunity all across our state.”