Employers Will Not Be Penalized if FUTA Surtax is Retroactively Reinstated

Unless Congress takes action soon, the federal unemployment tax rate (FUTA) will decrease by 0.2%, effective July 1, 2011. That is because the 0.2% FUTA surtax is scheduled to expire on June 30. The surtax is part of the 6.2% gross unemployment tax rate that employers pay on the first $7,000 of wages paid annually to each employee (6% permanent tax rate, 0.2% temporary surtax). The surtax has been in effect in every year since 1976, when it was enacted by Congress on a temporary basis. Unless new legislation is enacted, the FUTA tax rate, before consideration of state unemployment tax credits, will drop to 6.0%, effective July 1, 2011.

On the May 12 payroll industry conference call, the IRS was asked about the surtax. Sherry Saucerman, IRS Tax Analyst, noted that the IRS has no control over whether Congress enacts legislation to extend the surtax. She pointed out that the federal unemployment tax return (Form 940) is filed on an annual basis (due January 31 of each year). So it is possible that even if legislation is not enacted before July 1 to extend the surtax, it could be enacted prior to January 31 of next year, and be applied retroactively to July 1. The IRS was then asked how an employer would compute its upcoming quarterly FUTA tax deposits, which must be paid by all employers whose FUTA tax is more than $500 for the calendar year, if the legislation was to be applied retroactively. Shelley Dockstader, National Account Manager in IRS Electronic Tax Administration, replied that the IRS would have some mechanism in place under which an employer would not be assessed deposit penalties if it computed its third and fourth quarter unemployment tax deposits at a 6.0% rate, and legislation was enacted after the fourth quarter of this year that retroactively reinstated the surtax.

Observation: As of today, the surtax extension hasn't surfaced yet in Congress, although a proposal in the President's fiscal year 2012 budget would keep the 0.2% FUTA surtax in effect on a permanent basis. Another budget proposal would raise the annual FUTA wage base from $7,000 to $15,000 per worker, beginning in 2014. Federal unemployment tax rates would be lowered under this proposal, so employers' FUTA liability would not increase.