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The Bloomberg BNA Federal Tax Blog is a forum for practitioners and Bloomberg BNA editors to share ideas, raise issues, and network with colleagues about federal tax topics. The ideas presented here are those of individuals and Bloomberg BNA bears no responsibility for the appropriateness or accuracy of the communications between group members.

Federal Tax

Monday, November 26, 2012

FUTA Credit Reductions in 2012


Employers in some states could pay more in unemployment taxes in 2012 due to the states' failure to repay federal loans. Employers in affected states would have to pay additional taxes by January 31, 2013.

Employers pay federal unemployment tax (FUTA) on the first $7,000 of income earned by each employee. The FUTA tax rate of 6% (as of July 1, 2011) is offset by a 5.4% credit if employers pay into their state unemployment tax fund. As a result, the net FUTA tax for most employers is 0.6%.

However, federal law requires a reduction in the 5.4% credit when a state defaults on federal unemployment insurance loans. Specifically, the credit is reduced by 0.3% beginning with the second consecutive year in which a state failed to repay its federal loan, and an additional 0.3% for each additional year that the state remains in default.

The Department of Labor determined that 19 states are subject to FUTA credit reductions in 2012, resulting in an increase in the FUTA tax rate for employers. Employers in the following states must add 0.3% to the FUTA tax rate (for a total of 0.9%): Arizona, Delaware and Vermont.

Employers in the following states are subject to an increase of 0.6%, for a total FUTA tax rate of 1.2%: Arkansas, California, Connecticut, Florida, Georgia, Kentucky, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Rhode Island and Wisconsin. Indiana employers are subject to an extra 0.9%, for a total FUTA tax rate of 1.5%. Employers in the Virgin Islands are subject to an extra 1.5%, for a total FUTA tax rate of 2.1%.

--Vanessa Walts

Tax Law Editor (Compensation Planning)

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