FUTA Credit Reductions for 2010
The following tax alert was sent to TALX clients.
Employers are required to pay Federal Unemployment Tax Act taxes (FUTA) and state
unemployment insurance taxes (SUI). They may obtain a credit of 5.4% against the full
FUTA tax of 6.2% when they file the annual IRS FUTA 940 return each year. To obtain
the credit, state unemployment taxes paid must be paid in full and on time.
The Social Security Act requires a reduction in the FUTA credit when a state unemployment
trust fund has become insolvent and has had to borrow federal funds. When the federal
loans remain unpaid for at least two consecutive years, a reduction in the amount
of the available credit occurs. A FUTA credit reduction is the equivalent of an overall
increase in the FUTA tax. The reduction in the FUTA tax credit is 0.3% for the first
year and an additional 0.3% for each succeeding year. This amount is applied against
the outstanding loan balance until it is repaid. The determination of this tax increase
occurs on November 10 of the calendar year it is effective.
Indiana and South Carolina
As of November 10, 2010, the states of Indiana and South Carolina had outstanding
UI federal loans totaling $1,842,941,028.37 and $886,662,351.97, respectively. As
a result, employers in those states will see a 0.3% increase in their FUTA taxes for
calendar year 2010. The 1.1% FUTA tax rate will cost an additional $21 per employee
based on the $7,000 FUTA wage base. (0.8% + 0.3% = 1.1%).
As of November 10, 2010, the state of Michigan had an outstanding UI federal loan
balance in the amount of $3,810,769,149.67. Since 2010 is the second year federal
loans have been outstanding, employers in MI will be required to pay 1.4% in FUTA
taxes, or an additional $42 per employee. (0.8% +0.3% + 0.3%. = 1.4%)
What Employers Need to Know
Such FUTA tax increases are effective retroactive to January 1, 2010 and will be due
on the IRS Form 940 which needs to be filed by January 31, 2011. If the current amount
of states borrowing federal funds for UI purposes remains unchanged, 22 other states
will be liable for similar FUTA tax increases in 2011.
This weblog is sponsored by TALX.
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