Due to high unemployment rates that have occurred throughout the United States over the past several years, many states are now subject to a FUTA Credit reduction. This article will briefly discuss Credit reduction and how it may affect your business.
The standard Federal Unemployment Tax (FUTA) is 6.0% on the first $7000 in employee wages subject to FUTA. However, the federal government provides a 5.4% tax credit which results in an effective federal unemployment tax rate of 0.6% on the first $7000 in subject wages, (equivalent to $42 per employee, per year).
Why the Credit is Reduced
According to federal law, states with a high rate of unemployment and difficulty meeting their benefit obligations can borrow money from the FUTA account. If a state has an outstanding loan on January 1 for two consecutive years, and does not repay the full amount by November 10 of the second year, the FUTA credit rate for employers in that state will be reduced until the loan is repaid.
A state with an outstanding loan can avoid a credit reduction by repaying the loan by November 10th of the year the reduction is scheduled to take effect. If the loan is not repaid by that date, a credit reduction of 0.3% goes into effect, with employers in that state having their maximum credit reduced to 5.1% (5.4% – 0.3%) and their effective FUTA tax rate increased to 0.9% (0.6% + 0.3%) or $63 per employee in the first year of reduction. Each year a loan remains unpaid, the credit reduction increases by 0.3%, although there are limits for states that have made efforts to keep their balances in check.
How will this affect your company?
If you were required to pay state unemployment in any of the impacted states during 2012, you should expect to pay additional Federal Unemployment Tax on the wages paid in these states when the 940 return is filed for 2012 (due January 31, 2013). Each credit reduction increase of 0.3% will result in an additional $21 per employee that earns at least $7,000 in subject wages:
0.3% reduction = additional $21 per employee
0.6% reduction = additional $42 per employee
0.9% reduction = additional $63 per employee
1.2% reduction = additional $84 per employee
1.5% reduction = additional $105 per employee
The additional FUTA liability will appear on the Schedule A form, which is filed with the 940 return in the 4th quarter packet.
Legal Disclaimer: This article is intended for informational purposes only and by no means should replace or substitute other legal documents (governmental or non-governmental) reflecting similar content or advice. If you have any questions concerning your situation or the information provided, please consult with an attorney, CPA or HR Professional.