On November 4, House Democrats introduced the “Emergency Unemployment Compensation Act.” This legislation, which would extend federal unemployment insurance (UI) programs through 2012, also would prevent employers from paying a higher 2011 federal unemployment tax (FUTA) bill.
FUTA tax rate complications. Effective for wages paid beginning July 1, 2011, the FUTA tax rate, before consideration of state unemployment tax credits, is 6.0%. Many employers are allowed to claim 5.4% in state unemployment tax credits (known as the “normal credit”) against the FUTA tax rate if they timely pay their state unemployment taxes, making the net FUTA rate 0.6% beginning with wages paid on July 1. (Code Sec. 3302(a)).
However, the state unemployment tax credit may be lower for employers located in financially strapped states. Under Title XII of the Social Security Act, states with financial difficulties can borrow funds from the federal government to pay unemployment benefits. But 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. A number of states currently are behind on their loans from the federal government (see article in Federal Taxes Weekly Alert 07/28/2011 for more details).
Sec. 202 of the “Emergency Unemployment Compensation Act” would amend Code Sec. 3302(c) to eliminate automatic tax increases under FUTA that are due in January 2012 (for tax year 2011) from employers in states with outstanding UI loans to the Federal government. This tax relief would be conditioned on a state entering into a voluntary agreement under Sec. 203 of the bill. During the period of the agreement, a state could not alter the method of determining eligibility for, or calculating the amount or duration of, regular unemployment benefits.
Source: RIA Newstand 11/7/11
