FUTA Surtax Changes

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Due to California’s current budget woes, the state has not repaid money it borrowed from the federal government to pay unemployment benefits.  The Department of Labor has determined California to be a “credit reduction state” for 2011.  As such, employers that pay wages that are subject to the unemployment tax laws of a credit reduction state must pay additional federal unemployment tax.

FUTA tax is calculated on the first $7,000 paid in wages to each employee during a calendar year.  On June 30, 2011 the 0.2% FUTA surtax expired.  Therefore, the base FUTA rate for the first half of 2011 is 6.2% and 6.0% for the second half.  In the past California has received a credit to offset the FUTA rate of 5.4%.  This resulted in a net FUTA tax rate of .8% for California.  Since the credit reduction applies to California in 2011, there is an additional 0.3% of FUTA taxes assessed.  California employers will need to determine the base tax for pre-July 1st subject wages and one for post-June 30th subject wages on their Form 940 for 2011.  California employers will also have to attach Form 940 (Schedule A), Multi-State Employer and Credit Reduction Information which calculates the amount of credit reduction.

In all likelihood, unless California pays back the $9 billion it owes before November 30, 2012, the credit reduction will be increased from 0.3% to 0.6%.  This will result in a net FUTA tax rate of 1.2% for 2012 assuming that California does not repay the money borrowed to pay unemployment benefits.  The entire amount of credit reduction is treated as incurred in the fourth quarter and is therefore not due in any of the first three quarters of the year.  This is the case regardless of whether the state is in its first or subsequent years of credit reduction.  Fourth quarter payments must be made by the due date of the return which is January 31st.

You can visit the Department of Labor’s website for additional information at http://workforcesecurity.doleta.gov/unemply/finance.asp.

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