By: Travis Ward
The government is at it again! As we have all noticed, quite often in the last few years, our government can’t agree on anything and when they do it is very last minute or even late. One of their latest blunders is regarding Federal Unemployment Tax Act (FUTA). As many of you have noticed, the rate you are now paying for FUTA has gone down from .8% to .6%. Yes this is a small savings to you, but before you get too excited let me explain why this happened and how it could affect you down the road. The reason for the drop was because a .2% surtax, first enacted in 1977, will not be extended after June 30, 2011. This expiration happened because Congress didn’t have time to address the expiration. Speculation from the American Payroll Association, IRS, and the National Payroll Reporting Consortium tell us this should arrive for discussion by the end of the year ,and it is anticipated the they will extend the .2% surtax retroactive to June 30, 2011. If this happens, all employers will have to come up with the extra .2% tax that as of now is expired.
FUTA and SUTA are closely related as to the rates employers pay for unemployment taxes. Most states have an agreement with the IRS that says, if an employer pays SUTA tax to a state, they get a 5.4% discount on FUTA tax. So yes, this agreement helps you significantly. You could be paying as high as 6% FUTA tax ,where with this agreement you are only paying .6%. Now obviously, the past few years there have been an extremely high number of people claiming unemployment and most businesses have seen their state unemployment rates go up. When people file for unemployment, the state is responsible to pay those claims from their reserves. Most of the reserves for all states have been depleted, and this is the reason for the rate increases. When a state runs out of money, the agreement between the states and the IRS is they can borrow money from the IRS to cover unemployment claims, but they need to repay the money within two years. If these loans are not repaid within two years, employers in that state will begin to lose the 5.4% discount they are currently receiving from the IRS. Currently, there are 20 states that are about to default on these loans from the IRS. Hopefully states can figure out a way to repay their loans to help employers keep this discount. You can view the list of states on the verge of default at http://workforcesecurity.doleta.gov/unemploy/content/reduced_credit_states_2011.xls
The reason for me writing this article is to give you a fair warning that unemployment rates could continue to go up and some taxes may go retroactive back to June 30, 2011. If they go retroactive, the impact on small business will be small, but obviously the larger you are, the more impact this could have on you. Payroll Experts will continue to keep you informed and compliant as changes continue to happen. If you have any further questions please feel free to contact us.