As you know the current federal unemployment rate (FUTA) is 6.0% on the first $7,000 paid to each employee. Employers can take a 5.4% credit, bringing the effective FUTA rate to 0.6% provided the state is not in loan to the federal government and/or the employer is current on paying their share of the unemployment tax to the state. If either of these situations is present, the 5.4 % credit will be reduced.
Since 1976 employers were also paying 0.2% surtax for Federal Unemployment Tax (FUTA) to the federal government each year on the first $7,000 of wages paid to each employee until the surtax expired on June 30, 2011. The surtax was then removed lowering the amount of tax payable from 0.8% to the current 0.6% effective July 1, 2011. The good news is that the federal government has not raised the $7,000 taxable wage base like many states have had to do in order to recover funding for the large amounts paid out in unemployment wages over the past few years. In fact a state that has not repaid money it borrowed from the federal government to pay unemployment benefits within two years is known as a “FUTA credit reduction” state. As of December 31, 2012, there are currently 19 states still in credit reduction status. As an employer, having employees working in one or more of these 19 states you will be obligated to pay an additional amount to the state in order to help the state accelerate and repay its debt to the federal government. The credit reduction is 0.3% for each year the state has not repaid their loan.
This unexpected surtax can mean employers are obligated to pay larger sums of unemployment tax quarterly and annually. Listed are the states currently in credit reduction: Arkansas, Arizona, California, Connecticut, Delaware, Florida, Georgia, Indiana, Kentucky, Missouri, North Carolina, New Jersey, Nevada, New York, Ohio, Rhode Island, Vermont, Wisconsin, and the Virgin Islands.