Employers got a break on their 2011 FUTA taxes when the 0.2% temporary FUTA surcharge expired on June 30, making the net FUTA rate 0.6%. This largess, however, will not be shared by everyone.
Since 2008, states have borrowed heavily from the federal government to pay regular unemployment benefits. Bad: Employers in states that fail to pay back those loans within two years can’t take the full 5.4% FUTA credit. Worse: The credit continues to be reduced the longer loans remain outstanding. Credit reduction states for 2011 FUTA taxes have now been identified.
Credit reduction states
Employers in these states will experience an initial 0.3% credit reduction on their 2011 FUTA taxes: Arkansas, California, Connecticut, Florida, Georgia, Illinois, Kentucky, Minnesota, Missouri, North Carolina, New Jersey, Nevada, New York, Ohio, Pennsylvania, Rhode Island, Virginia and Washington.
Indiana has failed to pay back its loan for three years, so its credit reduction is 0.6%. Michigan’s credit reduction is 0.9%, because loans have been outstanding for four years.
If you’ve never done it before, figuring credit reductions can be tricky. Here’s an example:
Xaria is located in New Jersey and paid $60,000 in wages to three employees:
1. Total payments to each employee in excess of the $7,000 FUTA wage base:
3 × ($20,000 – $7,000) = $39,000
2. Total taxable FUTA wages paid in New Jersey:
$60,000 – $39,000 = $21,000
3. Credit reduction for New Jersey: 0.3%
4. Total credit reduction for Xaria:
$21,000 × 0.3% = $63.
ENTRIES ON FORM 940: Employers in credit reduction states must check the box on Line 2 in Part 1, complete Schedule A and then enter the amount from Schedule A on Line 11 in Part 3. Line 7 reflects the expiration of the 0.2% temporary surcharge by segregating wages paid before July 1 and after July 1.