The FUTA tax is a federal tax on employers that are covered by a state’s Unemployment Insurance program. The standard FUTA tax rate is 6% of the first $7,000 of wages subject to FUTA for each employee. The funds are used to create the Federal Unemployment Trust Fund, which is administered by the United States Department of Labor. Usually, employers receive a credit of 5.4% when they file their annual Form 940. When a state lacks the funds to pay UI benefits to its residents, it borrows funds from the Federal Unemployment Trust Fund. If the loans are outstanding on January 1 for two consecutive years and not paid in full by November 10 of the second year, the FUTA credit rate for employers operating within that state is reduced until the loan is paid in full. The reduction schedule is .3% for the first year, .6% for the second year, and an additional .3% for each year after that until the loan is paid in full. The credit reduction states are announced on November 10 of each year by the Department of Labor. Thus, the additional tax is considered incurred in the fourth quarter (although it is retroactive to the beginning of the year) and is due by January 31 of the following year.
Employers operating only in Massachusetts are not affected by the FUTA Credit Reduction in 2012. Employers operating within other states should see the list of subject states and rates on the United States Department of Labor Website. MassPay will calculate and collect any additional FUTA tax due in mid-January to allow us to pay the tax by January 31, 2013. The additional tax will be on the first $7,000 of FUTA taxable wages earned by each employee working within a state subject to the FUTA Credit Reduction. For example, an employer that had one employee in Connecticut that earned $7,000 in Quarter 1 of 2012 would be subject to an additional $42.00 ($7,000 wages x .6% CT Credit Reduction Rate), which would be debited by MassPay sometime in the middle of January 2013.
In addition to the FUTA Credit Reduction, employers in those states can expect to receive a Special Assessment bill from the state sometime in 2013. This is not a regular payroll tax and generally, employers will pay this directly to the state. A Special Assessment is one way for a state to pay its federal loans faster, and is usually calculated as a percentage of the employer’s taxable payroll for the prior year. Please be aware that not every state will issue a Special Assessment and those that do may not use the same formula for calculating the amount of the tax.