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IRS Releases 2011 Form 940: Important Updates to FUTA Rates & Credits

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21 States to Face a FUTA Credit Reduction for 2011 Tax Year

As previously discussed in the Employment Tax Reporter, employers in states which have taken out loans from the federal government to help cover their unemployment benefit obligations and were unable to pay them back by the end of the following calendar year now face a reduction in their FUTA credit.

Due to unfavorable economic conditions, many states took out these loans in 2010, and would have had to repay them by November 10^th of 2011 in order to avoid a credit reduction for their states’ employers.  Most states were unable to repay the loans, and in those states that defaulted, employers are now subject to paying the federal unemployment tax (FUTA) at rates higher than other employers.

TRANSLATION= Will Cost Most Employers $21 More Per Employee

The first $7,000 of an employee’s wages are subject to the FUTA tax (FUTA taxable wages), and the credit reduction is 0.3% in the first year of default, so the maximum credit for employers in “credit reduction” states will be 5.1% (the standard maximum credit of 5.4% is reduced by 0.3% = 5.1%), which translates to an additional employer cost of $21 per employee (or 0.3% x $7,000 = $21).

While most impacted states are in their first year of non-repayment, employers in states which took out loans in 2009 are now facing a credit reduction of 0.6%, as an additional credit reduction of 0.3% is taken for each year the loan remains unpaid.

The IRS’ 2011 version of Form 940, Schedule A, Multi-State Employer and Credit Reduction Information shows 21 states and the Virgin Islands are currently “credit reduction” states for the 2011 tax year.

Employers in credit reduction states do not have to make a federal unemployment tax deposit for the increase in their FUTA rate until their Q4 deposit is due on January 31, 2012.

Also worth noting is that the FUTA tax rate was 6.2% for Q1 and Q2, 2011, but decreased to 6.0% in Q3 and Q4, 2011.

A Few States are in Unique Situations Relative to Their Credit-Reduction Status:

Michigan- Michigan is in its fourth year of default, so Michigan employers are now subject to a 0.9% credit reduction (5.4%-0.9% = 4.5% maximum credit, or a loss of $63 in credit per employee).

Indiana- Indiana is in its third year of default, and Indiana employers are now subject to a 0.6% credit reduction (5.4%-0.6% = 4.8% maximum credit, or a loss of $42 in credit per employee).

South Carolina- South Carolina has not paid off its entire loan balance, but it will not be a credit reduction state in 2011, due to conditional approval from the DOL to receive the full 5.4% credit. (Under IRC §3302(g), a state can apply for avoidance of the credit reduction if certain conditions are met, including beginning to repay the loan and a net increase in the solvency of the state’s UI trust fund). South Carolina intends to pay off all of its loans by 2015, and to continue to receive the credit reduction avoidance in coming years. However, if the state does not receive approval from the DOL for 2012, it will face a credit reduction of 0.9%, as it will be in its fourth year of default.

Illinois- Illinois recently enacted legislation to issue state bonds in order to keep the state’s UI trust fund solvent and possibly prevent a credit reduction for 2012. However, due to the timing of the legislation, Illinois remains a credit reduction state for 2011, at 0.3%.

Alabama- Alabama paid off its loan just before the November 10, 2011 deadline and therefore its employers are not subject to a credit reduction in 2011.

The Other Credit-Reduction States (All at 0.3% for 2011):

• Arkansas
• California
• Connecticut
• Florida
• Georgia
• Kentucky
• Missouri
• Nevada
• New Jersey
• New York
• North Carolina
• Ohio
• Pennsylvania
• Rhode Island
• Virgin Islands
• Virginia
• Wisconsin

For more information on the 2011 Form 940 and credit reduction states, refer to www.irs.gov, and www.irs.gov/form940, where the IRS will post information about any future developments regarding the Form 940.

Sources:

Department of Labor, States Subject to FUTA Credit Reductions for 2011, accessed on 12/13/11 at http://workforcesecurity.doleta.gov/unemploy/finance.asp

American Payroll Association, “Twenty-One States/Territories Face FUTA Credit Reduction for 2011,” Payroll Currently, v19 n12, Dec. 9, 2011.

American Payroll Association, “IRS Releases Form 940 for Tax Year 2011,” Payroll Currently, v19 n12, Dec. 9, 2011.