In 1976, the Federal Government added a .2% surtax on the then 6% FUTA tax rate, or Federal Unemployment tax, that was created to repay loans made to cover the high demand on unemployment insurance and thus the resulting shortfall in funding. The demand on funding was due to high unemployment in the early 70’s. The loans were apparently repaid by 1987 but the Feds continued to approve extensions in the surtax to pay for other budgetary items. It appears that this is about to change as the IRS has seen no movement by Congress to extend this surtax.
Form 940 is an annual report for filing FUTA liability for the year. For 2011, it will be filed in Jan of 2012. As a result of this potential change, the IRS is developing a new form 940 for 2011 that will actually allow for employers to designate two different FUTA tax rates for the year. The current FUTA tax rate is 6.2% on the first $7,000 in wages paid to the employee for the year. This rate will apply for wages paid from January through June of 2011. If the surtax expires, The FUTA rate will fall to 6.0% for the second half of the year. Thus the new form will also allow for indication of wages paid and liability incurred for the period July through December at the new rate.
Remember that Feds grant a 5.4% credit for State unemployment taxes meaning that the FUTA tax will actually fall from .8% to .6%. But also keep in mind that those states that borrowed money from the Feds to fund their unemployment insurance programs these past few years, and have not repaid those loans by November of 2011, will be subject to at least a .3% reduction in that 5.4% credit. Thus employers in these states will see an overall increase in FUTA tax as a result. Currently 22 states and the Virgin Islands may be subject a reduction in their FUTA credit.
President Obama has proposed a suspension of that credit reduction for states that fail to pay back those loans along with raising the annual FUTA wage base from $7,000 to $15,000, basically more than doubling all employers FUTA tax. At this time, however, no action has been taken by Congress to implement this proposal.
