Scott R. Frick, CPA P.C.

Employers in 18 states will face higher FUTA rates in 2012

A spokesperson for the U.S. Department of Labor (DOL) has provided RIA with

the final list of states for which employers will not be eligible to claim the maximum amount of state unemployment tax credits on their 2012 federal unemployment (FUTA) tax return, because the state has had an outstanding federal unemployment insurance (UI) loan for at least two years.

Background. Employers pay FUTA tax at a rate of 6.0% on the first $7,000 of covered wages paid to

each employee during a calendar year. This tax may be offset by credits of up to 5.4% (known as the “normal credit”) against their FUTA tax liability for amounts paid to a state unemployment fund by January 31 of the subsequent

year. As a result, the net FUTA rate for many employers is 0.6% (i.e., 6.0% – 5.4%).

Under Title XII of the Social Security Act, states with financial difficulties can borrow funds from the federal government to pay unemployment benefits. However, if a state defaults on its repayment of the loan, the normal credit available is reduced. This effectively increases the employer’s FUTA tax rate by 0.3% beginning with the second consecutive January 1 in which the loan isn’t repaid, then an additional 0.3% annually thereafter. (Code Sec. 3302(c)) Thus, the net FUTA tax rate paid by an employer in a state that has had an unpaid loan with the federal government for two consecutive years will be 0.3% higher than the net 0.6% rate used by employers in states without past due loans. The net FUTA tax rate continues to rise 0.3% for each additional year that the loans remain unpaid.

Under Code Sec. 3302(g), provided that certain requirements are met, a state with an outstanding loan under Title XII may repay any advances using its unemployment trust fund account in lieu of having the credit reduction rules apply to its employers.

2012 FUTA tax credit reduction states. The DOL list includes 18 states and the Virgin Islands as FUTA tax credit reduction states for the 2012 tax year because they did not repay their outstanding federal loans by Nov. 10, 2012.

• 0.9% credit reduction state. Employers in Indiana will be subject to a 0.9% credit reduction (maximum $63 per employee) because of Indiana’s failure to repay its outstanding federal UI loans for four consecutive years.
• 0.6% credit reduction states. Employers in Arkansas, California, Connecticut, Florida, Georgia, Kentucky, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Rhode Island, and Wisconsin will be subject to a 0.6% credit reduction (maximum $42 per employee) because of their state’s failure to repay its outstanding federal UI loans for three consecutive years.
• 0.3% credit reduction states. Employers in Arizona, Delaware, and Vermont will be subject to a 0.3% credit reduction (maximum $21 per employee) because of their state’s failure to repay its outstanding federal UI loans for two consecutive years.

RIA observation: For the amounts of the above states’ outstanding loan balances as of Nov. 9, 2012, see workforcesecurity.doleta.gov/unemploy/budget.asp#tfloans .

Administration’s proposals. In its fiscal year (FY) 2013 budget (the “Green Book”), the Administration proposed suspending interest payments on state UI debt and suspending the FUTA credit reduction for employers in borrowing states in 2012 and 2013.

Courtesy of ThomsonReuters