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2011 and 2012 Increase to Federal Unemployment Taxes

Twenty states and the Virgin Islands will see an increase in their Federal Unemployment Tax (FUTA) for 2011 and 2012. Many state unemployment insurance funds borrowed from the federal government recently due to the economic downturn. When the loans remain unpaid for two years employers in their home state are subject to a reduction in the credit that employers take against FUTA. The reduction in the credit is used to repay the state’s obligation on unemployment insurance loans. The states had until November 10, 2011 to repay the loans to avoid the FUTA credit reduction.

Employers generally pay both federal and state unemployment insurance taxes on wages paid. The Federal rate is 6 percent. State rates vary greatly. The IRS allows a credit of 5.4 percent against the 6 percent for payment of state unemployment taxes. This makes the effective rate for FUTA 0.6 percent (.006) on taxable wages up to the limit of $7,000. 

The FUTA rate was reduced effective July 1, 2011 by 0.2 percent from the 0.8 percent it was in recent years. This complicated the Form 940 by assessing different rates for wages paid through June and wages paid between July and December 31, 2011. The 2011 Form 940 identifies the states that are subject to the FUTA Credit Reduction for 2011.

The 2011 Credit Reduction States

Arkansas Connecticut Georgia Indiana Michigan Missouri New Jersey North Carolina Pennyslvania Virginia Wisconsin

California Florida Illinois Kentucky Minnesota Nevada New York Ohio Rhode Island Virgin Islands

All but Indiana and Michigan have a reduced credit of 0.3 percent. For everyone besides Indiana and Michigan the net FUTA rate will be 1.1 percent for wages paid up to $7,000 for the first six months of 2011 and 0.9 percent for FUTA taxable wages paid between July and December 31, 2011. The FUTA rate is higher for Indiana and Michigan since they have failed to repay their loans for two or more consecutive years. Indiana’s rate for the first six months of 2011 is 1.4 percent and 1.2 percent for the last six months of 2011. Michigan’s rate is 1.7 percent for the first six months of 2011 and 1.5 percent for the remainder of 2011.

The IRS completed their revision of the 2011 Form 940, Schedule A, Multi-State Employer and Credit Reduction Information, in December 2011. The Schedule A must be completed by employers if they pay unemployment taxes to more than one state or if they paid wages in any of the states subject to the credit reduction in 2011. Employers in these states do not have to make a federal unemployment tax deposit for the increase in their FUTA rate until the fourth quarter deposit due on January 31, 2012. When completing the Schedule A, be sure to only include taxable FUTA wages, not all wages.

The FUTA rate for 2012 is set to remain at 0.6 percent of wages, up to the $7,000 limit. Employers in credit reduction states should be on alert as most will see an increase in FUTA taxes in 2012 (payable in January 2013). Unless the state pays off its loans, or federal law changes, their FUTA Credit Reduction will increase 0.3 percent annually. Illinois authorized the issuance of bonds in 2012 to pay off the outstanding loans. If this goes through, employers will not be subject to FUTA credit reduction in 2012. Texas did the same. Additional states, such as Colorado, Delaware, Kansas, and Vermont, are expected to become credit reduction states during 2012.

Employers should be aware that they carry the burden of annual interest assessments from the outstanding loans to the states. The interest on federal loans was waived through 2010 by the American Recovery and Reinvestment Act of 2009, but that has since expired.

Please contact Kim Haumann at khaumann@BlackmanKallick.com or 312-980-3249, Cara Hoffman at choffman@blackmankallick.com or 312-980-3274, or your Blackman Kallick advisor with any questions.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.