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2012 budget contains FUTA proposals

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in Employee Benefits Program,Employment Law,Small Business Tax Deduction Strategies

States that borrow from the federal government to pay regular unemployment benefits must pay back those loans, including interest. The 2009 American Recovery and Reinvestment Act waived interest payments for two years, but that provision expired at the end of last year, leaving an estimated 30 states to face a financial bind.

President Obama’s 2012 budget proposal contains relief for strapped states and employers. Whether these measures will make it into a final budget document remains to be seen.

What is certain is that all employers would be affected if they do.

FUTA mechanics

FUTA consists of two parts—a 0.2% “temporary” surtax and a 6% permanent tax, payable on a $7,000 wage base. Employers that pay their state unemployment taxes on time can take a 5.4% credit against their FUTA taxes, for an overall FUTA tax rate of 0.8%. However, the FUTA credit is automatically reduced by 0.3% each year state loans remain outstanding.

For 2011, the maximum FUTA credit for Michigan employers is 4.8% (i.e., two credit reductions); the maximum FUTA credit for employers in Indiana and South Carolina is 5.1% (i.e., one credit reduction). Other states will surely join Indiana, Michigan and South Carolina, which isn’t good news for employers.

WHAT DO YOU MEAN BY TEMPORARY? The temporary 0.2% FUTA surtax was enacted in 1976, and has been extended many times since then, sometimes retroactively. The next expiration date is June 30, 2011. What to do: The overall FUTA credit, including the surtax, is figured when you file your annual Form 940 next January. For now, continue to deposit FUTA taxes quarterly, with the presumption that the surtax will again be extended.

Budget proposals

The proposal contains a mix of carrots and sticks for states and employers. Carrots: Interest payments on state debt would again be suspended for 2011 and 2012. The automatic reduction in employers’ FUTA credit would also be suspended.

Beginning in 2014, the overall FUTA tax rate would be reduced to 0.38%. Sticks: Beginning in 2014, the $7,000 FUTA wage base would more than double, to $15,000, and would be indexed for inflation, beginning in 2015. The 0.2% temporary tax would become permanent. Bottom line: The overall amount employers pay in FUTA taxes would remain the same.

Although FUTA taxes would remain constant under these proposals, the real impact would be felt at the state level, since states must conform their unemployment laws to FUTA. Upshot: States with wage bases of less than $15,000 would have to raise them to the new federal level, which means that employers’ state unemployment taxes would increase. States, however, would remain free to reduce their tax rates.

The following states currently have wages bases that equal or exceed $15,000: Alaska, Connecticut, Hawaii, Idaho, Iowa, Minnesota, Montana, Nevada, New Jersey, New Mexico, North Carolina, North Dakota, Oklahoma, Oregon, Rhode Island, Utah, Washington and Wyoming.

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