Employers Won't Be Penalized If FUTA Surtax Is Retroactively Reinstated

Unless Congress takes action soon, the.2% federal unemployment tax (FUTA) surtax will expire effective July 1, 2011. An IRS spokesperson has indicated that 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 reinstates the FUTA surtax.

Background. Under Code Sec. 3301(1), 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'76, 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.

IRS talks about the change. On the May 12 payroll industry conference call, IRS was asked about the surtax. Sherry Saucerman, IRS Tax Analyst, noted that 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 effective retroactively to July 1.

IRS was then asked how an employer would compute its upcoming quarterly FUTA deposits, which must be paid by all employers whose FUTA 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 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, so employers' FUTA liability would not increase.

References: For imposition of FUTA, see FTC 2d/FIN ¶H-4726; United States Tax Reporter ¶33,014; TaxDesk ¶550,501; TG ¶9801.