Payroll & Business Experts Blog

Is Your Business in a FUTA Credit Reduction State?

Posted by PrimePay Business and Experts Blog

Dec 23, 2011 7:30:00 AM

FUTA credit reduction statesTwenty states have a Federal Unemployment Tax Act (FUTA) credit reduction for 2011.  Employers in a credit reduction state must remember to calculate a credit reduction as an adjustment to their FUTA tax on their 2011 IRS Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return.  Credit reduction states are states that did not repay the money they borrowed from the Federal government to pay unemployment benefits.  Employers must include liabilities owed for credit reduction in calculating their fourth quarter deposit.

What is the Current FUTA Tax Rate?
The current FUTA tax rate is 6.0% on the first $7,000 paid to each employee each year.  The 6.0% FUTA rate has been in effect since July 1, 2011 when the 0.2% FUTA surtax expired.  Employers receive a FUTA credit of 5.4% for timely state unemployment insurance (SUI) payments, making the effective tax rate 0.6% for employers that are not in a credit reduction state.

What Factors Determine if a State is Impacted by a FUTA Credit Reduction?
Under the Federal and state unemployment insurance system, states with a high rate of unemployment and those that have difficulty meeting their benefit obligations can borrow money from the Federal Unemployment Account to pay unemployment benefits.  If loans taken out during one year are not repaid by the end of the following calendar year, the FUTA credits for employers in those states are reduced, with the extra FUTA taxes paid being applied against each state’s loan balance.

Who Determines the Credit Reduction States?
The Department of Labor (DOL) determines the credit reduction states for each year.  The DOL does not announce the credit reduction states until after November 10th of each year.  For 2011, employers in 20 states must reduce their 5.4% credit on their IRS Form 940.  If employers pay wages that are subject to the unemployment tax laws of a credit reduction state, the employers must pay additional FUTA tax. 

How are FUTA Credit Reductions Calculated?
For 18 of the states that have outstanding FUTA loans, the credit is reduced by an additional 0.3% on wages up to $7,000 per employee which equates to an additional payment of $21 per employee.  Because the 5.4% credit is reduced, the employer now owes more money to FUTA.  Instead of the standard 5.4% credit allowed, employers in these 18 states will have a reduced credit of 5.1% for 2011 (6.0% - 0.6% = 5.4% - 0.3% = 5.1%), making their FUTA tax rate 0.9%. 

For 2011, there are 2 states where the FUTA credit reduction is not 0.3%.  The exceptions are Indiana where the credit reduction is 0.6% instead of 0.3% and Michigan where the credit reduction is 0.9% instead of 0.3%. 

Which States are FUTA Credit Reduction States for 2011?
The following 20 states currently have outstanding Federal Unemployment Trust Fund loans.  Employers in these states must reduce their 5.4% credit on Form 940.

FUTA credit reduction states
It is important to note that the FUTA credit reduction only applies to employers who pay SUI wages to the states listed above.  Employers in all other 30 states will receive the full FUTA credit of 5.4%.

Want an Easy Reference Guide for FUTA Credit Reduction States and FUTA Tax Rates by State for 2011? Download this Free Guide Below!

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Topics: payroll, state compliance, payroll tax filing

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