FUTA Tax Rate Drops

I guess if Congress can not complicate income tax, they would complicate one of the easiest to understand and pay – the Federal Unemployment Tax (FUTA).

Effective for wages paid beginning July 1, 2011, the FUTA tax rate, before consideration of state unemployment tax credits, is 6.0%. Most employers are allowed to claim 5.4% in state unemployment tax credits (known as the “normal credit”) against the FUTA tax rate if they timely pay their state unemployment taxes, making the net FUTA rate 0.6% beginning with wages paid on July 1.  The net rate was 0.8% on wages paid from January 1 to June 30, 2011. Employers pay FUTA tax on the first $7,000 of employee annual wages.

To further complicate matters, if a state defaults on its repayment of its federal loan, the normal credit available is reduced.  Many states are at risk of defaulting on their loans and eliminating the credit entirely. If these loans are not repaid by the Nov. 10, 2011 due date, employers in these states will not be eligible to claim the full 5.4% in state unemployment tax credits against the FUTA tax rate.

Here is what the tax rates look likeby state, based on information available as of July 20, 2011:

•States currently eligible for a net FUTA tax rate of 0.8% in the first half of 2011, and a net FUTA tax rate of 0.6% in the second half of 2011. Employers in Alaska, Arizona, Colorado, Delaware, the District of Columbia, Hawaii, Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts, Mississippi, Montana, Nebraska, New Hampshire, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Tennessee, Texas, Utah, Vermont, Washington, West Virginia, and Wyoming are all currently eligible for these rates because, as of Jan. 1, 2011, these states did not have outstanding loans with the federal government for two consecutive years. Therefore, they are entitled to the full 5.4% normal credit, resulting in a 0.8% net rate for the first half of 2011 and a 0.6% rate for the remainder of the year.

•States currently scheduled to pay a net FUTA tax rate of 1.1% in the first half of 2011, and a net FUTA tax rate of 0.9% in the second half of 2011. Employers in Alabama, Arkansas, California, Connecticut, Florida, Georgia, Idaho, Illinois, Kentucky, Minnesota, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, the Virgin Islands, Virginia, and Wisconsin will pay these rates unless the federal loans are repaid by Nov. 10, 2011 because, as of Jan. 1, 2011, these states had outstanding loans with the federal government for two consecutive years (i.e., the loans were presumably made in 2009 and currently remain unpaid). Therefore, they are entitled to a reduced 5.1% credit (5.4% less 0.3%), resulting in a 1.1% net rate for the first half of 2011 and a 0.9% rate for the remainder of the year.

•States currently scheduled to pay a net FUTA tax rate of 1.4% in the first half of 2011, and a net FUTA tax rate of 1.2% in the second half of 2011. Employers in Indiana and South Carolina will pay these rates unless the federal loans are repaid by Nov. 10, 2011 because, as of Jan. 1, 2011, these states had outstanding loans with the federal government for three consecutive years (i.e., the loans were presumably made in 2008 and currently remain unpaid). Therefore, they are entitled to a reduced 4.8% credit (5.4% less 0.6%), resulting in a 1.4% net rate for the first half of 2011 and a 1.2% rate for the remainder of the year.

•Michigan employers currently scheduled to pay a net FUTA tax rate of 1.7% in the first half of 2011, and a net FUTA tax rate of 1.5% in the second half of 2011. Michigan employers will pay these rates unless the federal loans are repaid by Nov. 10, 2011 because, as of Jan. 1, 2011, Michigan had outstanding loans with the federal government for four consecutive years (i.e., the loans were presumably made in 2007 and currently remain unpaid). Therefore, they are entitled to a reduced 4.5% credit (5.4% less 0.9%), resulting in a 1.7% net rate for the first half of 2011 and a 1.5% rate for the remainder of the year.

To further complicate matters, it’s possible that legislation could be enacted that would retroactively reinstate the FUTA surtax, effective July 1, 2011. President Obama’s 2012 budget proposal included, among other things, eliminating the FUTA credit reduction in 2011 and 2012.

If you have any questions regarding your FUTA ta

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