FUTA stands for the Federal Unemployment Tax Act; it’s the name we use for the Federal Unemployment tax employers must pay. FUTA is paid on the first $7,000 of eligible wages for each employee each year. However, you get a credit for timely payments made to your state unemployment system. In the past, the Federal rate has been 6.2% less the typical 5.4% credit for contributions to the state unemployment system, for a net FUTA tax rate of 0.8%. That’s $56 per employee.
Since 1976, we have had a Federal 6.0% rate with a temporary surcharge of 0.2%. But this year, Congress let that 0.2% surcharge expire. So, starting July 1, 2011, the rate has dropped back down to 6.0%. That means that employers need to track their pre-July 1 wages and post-July 1 wages separately so they can report and pay on them at the different rates. The last quarterly payment on FUTA at the old rate was due August 1. From now on, employers need to calculate at 6.0%. The next quarterly deposit is due October 31.
KEEP YOUR EYES PEELED: Just because Congress let this surcharge lapse doesn't mean they can't reinstate it prospectively or even retroactively. Alas, we have to follow the current rules until they aren't current anymore.
Here’s another wrinkle: States can borrow from the Feds to keep their Unemployment Funds solvent. But, if the states delay in paying back those loans, employers in the states pay the price with reduced credits against FUTA. Here in Washington, we don’t have any loans from the Feds that are over two years old, so we don’t have to pay the penalty. Poor Michigan – employers there have to pay something like $60 extra per employee because their state has outstanding loans from the Feds that are over four years old.
So, if you use a do-it-yourself payroll tool, but sure to update your rates. In QuickBooks, the Federal updates should happen automatically. But, you can make sure by going to the Employee menu and choosing Get Payroll Updates. To update state rates, change the state unemployment item in the Payroll Item list.
And by the way: unemployment benefits are not tied directly to the rate, so benefits won’t change as a result of this rate change.
If you have any questions about this or other payroll topics, give Moseley & Associates a shout!