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The Federal Unemployment Tax Act was established well over 30 years ago with the intention of providing monetary support to people who involuntarily lost their jobs, and was implemented to hold employers accountable for their workforce in terms of hiring and firing. The FUTA tax is due each year at the current contribution rate of 6% less an offset of 5.4% FUTA tax credit if an employer has paid their state unemployment taxes on time and in full. Each quarter an employer is also responsible to pay their contribution rate assessed by their state unemployment division depending on where their employees work. Employers may have more than one state SUTA tax to pay depending on the location of their workforce

The new rate of 6% on the federal taxable wage base of $7,000 was started on July 1, 2011. It is important to understand how the offset credit of 5.4% is necessary in determining whether your business will owe more money. Here are some examples on how your business could be responsible for more federal unemployment tax later this year:

  1. Paying your state unemployment taxes late! The federal law states that if your business pays the state unemployment tax late then you will only receive 90% of the offset credit for the amount of the late payment.
  2. States currently take in funds each quarter for wages paid during the previous three months. However, each state pays unemployment as the claims occur which means that states can become deficient in their reserves that will cause them to borrow from the federal government. A Title XII loan from the federal government must be paid back as soon as possible. However, if the state has an outstanding loan for more than two consecutive years the full amount due is to be paid by November 10 of the second tax year. If the state has not paid by then, it will be considered a “credit reduction” state. Employers in that state lose available FUTA credit by 0.3%, cumulatively, each year there is an unpaid balance owed to the federal government. The following states are now subject to credit reduction amounts where employers must pay additional FUTA:

Arkansas, California, Connecticut, Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, Minnesota, Missouri, North Carolina, New Jersey, Nevada, New York, Ohio, Pennsylvania, Rhode Island, U.S. Virgin Islands, Virginia and Wisconsin (state list as of January 1, 2011).

During the first week of December Payce will determine if your state is in “credit reduction” status and will advise you of any additional amounts owed once the November 10th due date establishes which states will still owe the IRS outstanding loan balances.