Employers may surprised to find that they owe more federal taxes on employee wages than they expected for 2011 and they could continue to pay more in 2012. Ohio, Michigan, Indiana, Kentucky and Pennsylvania are just a few of the 21 states that accepted a loan from the federal government for unemployment insurance that have outstanding balances on the loan – and as a result are collecting more federal unemployment taxes.
To understand what has occurred, let’s look at how the federal unemployment tax works. A federal tax is levied on employers covered by the unemployment insurance program through the American Federal Unemployment Tax Act, known as FUTA. Employers paid a rate of up to 6.2 percent on wages up to $7,000 per year paid to a worker between January 1 and June 30, 2011, and since July 1, 2011, are paying a rate of up to 6.0 percent on wages up to $7,000 per worker.
Normally, the federal government provides a tax credit of up to 5.4 percent to employers who pay state taxes timely under an approved unemployment insurance program. However, that credit is reduced if a state government has an outstanding balance against a loan from the federal government that was provided to pay unemployment benefits.
The state governments had until November 10, 2011 to repay their loans. Beginning November 11, 2011, the FUTA credit was reduced and will remain reduced until the states pay off their outstanding loan balances. As a result, on November 11, 2011, employers in all 21 states were automatically required to pay extra FUTA taxes – but more importantly, the additional taxes are retroactive to January 1, 2011. Ohio’s FUTA tax rate is .3 percent; however the rates in surrounding states range from .3 percent to .9 percent in Michigan.
So what does this mean to your business? If you own a company based in Ohio with 100 employees who each earned wages of more than $7,000 (the maximum wage amount FUTA tax can be applied to) in 2011, your company would owe an additional $2,100 in FUTA taxes for 2011, which would be due by January 31, 2012.
If you have additional questions about the retroactive FUTA taxes or making adjustments to your payroll tax filing, please contact your Rea advisor.
Robert Ferguson, CPA, of Rea’s Marietta office, also contributed to this article.