Blog - What is the FUTA Credit Reduction…and Does It Apply to Me?

What is the FUTA Credit Reduction…and Does It Apply to Me?

Depending on the states in which you do business, you may have received an unhappy surprise at the end of December.  It’s possible you will have to pay an additional amount of Federal Unemployment taxes for 2012 if your state was unable to pay all the unemployment benefits due its residents and had to obtain loans from the federal government to cover them. 

In a nutshell, here’s how the federal unemployment tax (FUTA) works and why you may have to pay more for 2012:

  • A federal tax is levied on employers covered by the federal unemployment insurance program.  This amount equals 6% of wages up to $7,000 per year for each worker.
  • However, if the employer pays the state unemployment tax (this rate varies by state), the employer receives a credit of up to 5.4% on the federal tax.  This brings the effective tax rate down to .6% of the first $7,000 in wages, or $42 per year per employee.
  • If your payroll is handled by a payroll provider, the FUTA tax liability has likely been taken from your bank account with each payroll and submitted to the IRS on your behalf.  If you prepare your own payroll, you have probably submitted your tax payment each quarter, or if the liability was under $500, you may have waited until year-end to submit it.
  • If your state lacked the funds to pay unemployment benefits, it obtained a loan from the federal government and, if it was unable to pay the full amount of the loan back within a specified timeframe, the federal government became entitled to recover those funds directly from the employer until the loan is repaid.  This is the FUTA Credit Reduction.

As of November 11, 2012, 19 states had outstanding federal loans and, therefore, employers in those states have to pay additional FUTA taxes retroactive to January 1, 2012.

The list of states and the additional percent due are as follows:

  • North Carolina (.6%) = $42.00 per covered employee
  • Arizona, Delaware, Vermont (.3%) = $21.00 per covered employee
  • Arkansas, California, Connecticut, Florida, Georgia, Kentucky, Missouri, New Jersey, Nevada, New York, Ohio, Rhode Island, Wisconsin (.6%) = $42.00 per covered employee
  • Indiana (.9%) = $63.00 per covered employee
  • Virgin Islands (1.5%) = $105.00 per covered employee

So, what happens now?  If you work with a payroll provider, you should be contacted about the additional amount due and the payroll provider should handle it from there.  (Be sure to confirm that your provider is taking care of this for you!)  Your 940 Tax Return will reflect the additional amount due and paid.  If you prepare your own payroll, you’ll want to ensure you have calculated and paid the additional tax due no later than January 31, 2013, and complete the 940 properly.

For complete IRS instructions on the FUTA Credit Reduction, please go to http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/FUTA-Credit-Reduction

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