Thursday, July 7, 2011

FUTA Surtax Is No Longer In Effect

Beginning July 1, the 0.2% federal unemployment tax (FUTA) surtax is no longer in effect. Thus, the FUTA tax rate, before consideration of state unemployment tax credits, is now 6.0%.

Background. Under Code Sec. 3301(1), the 0.2% FUTA surtax expired on June 30, 2011. The surtax was part of the 6.2% gross unemployment tax rate that employers paid 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. Since legislation hasn't been enacted to extend the surtax, the FUTA tax rate, before consideration of state unemployment tax credits, now drops to 6.0%, effective July 1, 2011.

So what does this mean for employers? As IRS noted on its June 2 payroll industry conference call, employers need to separately track FUTA taxable wages paid before July 1, and FUTA taxable wages paid after June 30, since the FUTA tax rates are different during those two periods. Employers whose FUTA tax is more than $500 for the calendar year need to make quarterly FUTA deposits. The next quarterly payment is due on Aug. 1, but that payment is based on taxable wages earned through June 30, so it will be computed using the 6.2% FUTA tax rate. However, the payment after that is due on Oct. 31, 2011, and it will be computed using the 6.0% FUTA tax rate if legislation is not enacted to retroactively reinstate the FUTA surtax beginning July 1, 2011.

On an IRS conference call, Shelley Dockstader, National Account Manager in IRS Electronic Tax Administration, said that IRS would have some mechanism in place under which an employer would not be assessed deposit penalties if it computed its unemployment tax deposits at a 6.0% rate, and legislation was enacted to retroactively reinstate the surtax.

IRS is working on revising Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, to take into account the elimination of the surtax. That return must be filed in January 2012.

Observation: Whether Congress will retroactively reinstate the surtax is an open question. On June 30, 2011, Ways and Means Committee Chairman Dave Camp (R-MI) issued a press release applauding the fact that Republicans have refused to entertain an extension of this “temporary” tax on jobs beyond its current June 30, 2011 expiration date. No surtax extension legislation has 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.

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