Implications of FUTA Tax Change on Payroll and Reporting

The Federal Unemployment Tax Act, commonly known as FUTA, provides tax compensation to workers who have lost their jobs. Usually, employers are required to pay the federal unemployment tax, so this is not deducted from the employee’s wages. There are three tests to determine how much FUTA tax to pay: general, household, and farmworker. Generally, the amount paid depends on if the employer has exceeded a certain amount of payment as wage, or a certain number of direct employees working each year.

Normally, the FUTA tax rate is 6.2% of taxable wages, with the base as the first $7,000 paid to each employee during a calendar year. Employers who pay the state unemployment tax on a timely basis will receive an offset credit of up to 5.4%, making the net FUTA tax rate 0.8% for a maximum of $56 per employee per year. In 2010, when states failed to turn in their loans, the FUTA rate was increased, resulting in a $77 per-employee contribution. However, with this new act, the FUTA rate will be decreased to 6% in the absence of any credit reduction.

The revenue gained from FUTA is used to provide loans to states to control the unemployment situation and pay benefits to the unemployed. A 0.2% surtax that was added in 1976 is going to be dissolved if the extension of benefits is not approved. This is going to create severe unemployment condition in states since the FUTA taxable wages are going to remain unaffected. Therefore, while workers will suffer, the liability computation is going to favor the employers affected in the 2011 calendar year.