futa surtax rate changeThe following is a guest blog post by Brendan Nicholls, Sales Manager at PrimePay.

Unless new legislation is enacted, the Federal Unemployment Tax Act (FUTA) surtax is scheduled to expire on June 30, 2011. This surtax, which is .2%, is a temporary portion of the 6.2% gross unemployment tax rate that employers pay on the first $7,000 of wages paid annually to each employee. Typically, employers can take a credit against their FUTA tax for amounts paid into state unemployment funds. The credit may be as much as 5.4% of FUTA taxable wages. In this case, if an employer is entitled to the maximum 5.4% credit, the FUTA tax rate after credit is 0.8%. 

Learn About Computing the FUTA Tax in Section 14 of IRS Publication 15, (Circular E), Employer’s Tax Guide

Who is Eligible for the Maximum FUTA Credit?
Wondering if your business is entitled to the maximum credit if you paid state unemployment taxes? Employers are eligible if:

  • You paid your SUTA tax on time
  • You paid your SUTA tax in full
  • You paid your SUTA tax on all the same wages as are subject to FUTA tax
  • Your state is not determined to be a credit reduction state.  In 2010, these states were SC, IN, and MI.  2011 will be determined.

Background on the FUTA Surtax
The FUTA surtax was implemented in 1976 when Congress enacted it on a temporary basis to fund unemployment benefits. Currently employers pay a maximum of $56 per year per employee for FUTA. For 2012 and beyond, the savings will amount to $14.00 per employee. This assumes the $7,000 taxable wage base will remain the same. It is too early to tell if the wage base will rise, but historically when the FUTA tax took effect in 1939, the wage base was set at $3,000, increased to $4,200 in 1972, went up to $6,000 in 1978, and is currently at the 1983 revision of $7,000. 

How Will the FUTA Change Affect the 940 Tax Return?
So what happens when the FUTA tax rate drops to .6% effective July 1, 2011? According to an IRS representative, if the surtax is not extended, employers will need to separately track FUTA taxable wages paid before July 1, 2011 and those paid after June 30, 2011. IRS Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, will need to be revised to accommodate the two different FUTA rates for calendar year 2011. Right now the IRS is working on making this change, but they noted that the surtax might very well be extended. If the surtax expiration is pushed off to a later date in 2011, it will be retroactive to July 1, 2011. If the extension is not passed until after third quarter filings and payments have been made, the IRS says that there will not be penalties to employers for underpayments because of this retroactive extension.

Currently, a proposal in the President's fiscal year 2012 budget would keep the 0.2% FUTA in effect permanently. To accompany this, another budget proposal starting in 2014 would raise the annual FUTA wage base from $7,000 to $15,000 per worker. In that proposal, Federal unemployment tax rates would be lowered, so employers' FUTA liability would not increase. PrimePay is monitoring the issue closely if any changes arise.