FUTA Credit Reductions in 2011
Resulting rate changes and their effect on employers
Posted on December 22, 2011
While the country begins to see positive changes in the economy, many aspects of the troubled economic times we have recently experienced will be with us for years to come. One will certainly be the effects of high numbers of unemployed workers, extended unemployment benefits and the correlating insolvency of many state unemployment funding programs.
Unemployment insurance (UI) is a program established by the Federal Unemployment Tax Act (FUTA) that is jointly financed through federal and state employer payroll taxes. It is designed to provide individuals with emergency income in times of involuntary unemployment and to encourage employers to effectively manage their workforce. In general, most employers must pay both state and federal unemployment taxes if they pay wages to employees of $1,500 or more in any quarter of a calendar year or if they had at least one employee during any day of a week during any 20 weeks, consecutive or not, in a calendar year. In New Jersey, Alaska and Pennsylvania, both employees and employers are required to pay unemployment taxes.
Calculating FUTA Taxes
The FUTA UI tax rate was originally set at 6.0%. For over 30 years, a temporary surcharge of 0.2% made the effective FUTA UI tax rate 6.2%. The surcharge expired on June 30, 2011, and the rate reverted to 6.0% as of July 1, 2011. However, it is important to understand that most employers do not pay employers that pay their state unemployment tax on time receive an offset FUTA tax credit of 5.4%, resulting in a net rate of 0.6%.
There are three ways that employers can lose FUTA tax credits:
- If an employer does not pay their state UI taxes on time, they receive a 90% offset credit for the amount of the late payment.
- If the state’s UI law does not conform to federal law, all employers in that state lose the entire 5.4% FUTA tax credit.
- State UI tax programs are based on forward-funding. When they have exhausted their reserves, states borrow from the federal government in the form of a Title XII loan to fund UI. However, if the state has an outstanding loan balance on January 1 for two consecutive tax years, the full amount is due to be paid no later than November 10 of the second tax year. If the loan is not paid in full by that date, the state is then considered a “credit reduction” state; employers in that state lose available FUTA credit by 0.3%, cumulatively, each year there is an unpaid balance owed the federal government.
The FUTA wage base is the maximum annual amount of earnings on which unemployment taxes may be levied. Because the federal wage base is currently set at $7,000, the maximum FUTA tax expense in 2012 for employers that pay their state unemployment tax on time is $42 per employee annually if they are not in a credit reduction state.
FUTA Credit Reduction
In November, the U.S. Department of Labor announced the final list of states that have outstanding federal loans for 2011. Because the states involved have not paid their Title XII loans in full, the conditions of those loans require all employers in those states to lose a portion of the credit against the full FUTA tax for 2011. In 2011, 20 states plus the U.S. Virgin Islands failed to pay their loans in full. Because their FUTA credit has been reduced, employers in those states are now subject to higher unemployment taxes retroactive to January 1, 2011.
The following chart outlines states in which employers must pay additional FUTA taxes for 2011:
Consider this example:
Michigan employers have received a FUTA credit reduction for three years. In that state, the total credit reduction is now at 0.9%, resulting in a net FUTA tax rate for Michigan employers of 1.7% as of January 1, 2011.
A Michigan employer had 15 employees throughout 2011. All employees earned over $7,000. The employer has paid FUTA throughout the year at .8%. So far this year, the employer has paid a total of $840 in FUTA tax:
15 employees x $7,000 =$105,000 (total FUTA taxable wages)
$105,000 x .8% =$840.00 (total FUTA liability for the year).
With a credit reduction of .9%, the employer must pay an additional .9% in FUTA tax for the year:
$105,000 x .9% =$945.00 (additional FUTA liability for 2011).
The same concept applies to the other states; the difference is the amount of the credit reduction. Assuming the same total FUTA taxable wages for the year:
An Indiana employer would pay:
$105,000 x .6% =$630.00 (additional FUTA liability for 2011).
Whereas an Arkansas, California, Connecticut, Florida, Georgia, Illinois, Kentucky, Minnesota, Missouri, North Carolina, New Jersey, Nevada, New York, Ohio, Pennsylvania, Rhode Island, Virginia, or Wisconsin employer would pay:
$105,000 x .3% =$315.00 (additional FUTA liability for 2011).
You can keep up with legislative changes in your state and the federal government by visiting the IRS Small Business and Self-Employed Tax Center. CPAs and other payroll professionals may also find the small business articles found on the IRS website to be valuable.
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The material contained in this document is for informational purposes only and is current as of the date of publication. CompuPay is not a legal advisor or financial advisor and makes no claims as such. For financial or legal advice, please seek the advice of a professional.
Listed in Employer Resources.