FUTA credit reduction
Under the provisions of the Federal Unemployment Tax Act (FUTA), a Federal tax is levied on employers covered by the Unemployment Insurance program at a current rate of 6.2% on wages up to $7,000 a year paid to a worker. The law, however, provides a credit against Federal tax liability of up to 5.4% to employers who pay state taxes timely under an approved state UI program. Accordingly, in states meeting the specified requirements, employers pay an effective Federal tax of 0.8%, or a maximum of $56 per covered worker, per year.
The credit against the Federal tax may be reduced if the state has an outstanding advance (commonly called a “loan”). When states lack the funds to pay UI benefits, they may obtain loans from the Federal government. To assure that these loans are repaid, and in accordance with Title XII of the Social Security Act, the federal government is entitled to recover those moneys by reducing the FUTA credit it gives to employers, which is the equivalent of an overall increase in the FUTA tax. When a state has an outstanding loan balance on January 1 for two consecutive years, and the full amount of the loan is not repaid by November 10 of the second year, the FUTA credit will be reduced until the loan is repaid. This process is commonly called FUTA Credit Reduction and was designed as an involuntary repayment mechanism. The reduction schedule is 0.3% for the first year and an additional 0.3% for each succeeding year until the loan is repaid. From the third year onward, there may be additioal reduction(s) in the FUTA tax credit (commonly dubbed "add-ons").
As of November 10, 2010, the states of Indiana, Michigan and South Carolina had outstanding UI federal loans and as a result, employers in these states will see an increase in their FUTA taxes that are effective retroactive to January 1, 2010:
Indiana: 1st year in default, employers will pay FUTA tax of 1.1% (an increase of 0.3%)
Michigan: 2nd year in default, employers will pay FUTA tax of 1.4% (an increase of 0.6%)
South Carolina: 1st year in default, employers will pay FUTA tax of 1.1% (an increase of 0.3%)
External links
- Multi-State Employer and Credit Reduction Information: Schedule A (FORM 940) for 2010
- States Subject to FUTA Credit Reduction for Tax Year 2010
- States Potentially Subject to FUTA Credit Reduction for Tax Year 2011
Retrieved from : http://en.wikipedia.org/wiki/FUTA_credit_reduction
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