Higher FUTA Taxes for NJ & PA Employers

New Jersey and Pennsylvania employers are facing higher unemployment taxes under the Federal Unemployment Tax Act (FUTA) because of loans the states received from the federal government to pay unemployment insurance benefits. To assure that the states repay these loans, the federal government partially recovers those monies by reducing the FUTA credit it gives to employers, which is the equivalent of an overall increase in the FUTA tax. For employers in credit reduction states, this could lead to an increase in 2011 4th quarter tax payments payable in January 2012.

Under the provisions of the Federal Unemployment Tax Act (FUTA), a Federal tax is levied on employers covered by the Unemployment Insurance (UI) program at a current rate of 6.0% on wages up to $7,000 a year paid to an employee. The law provides for a credit against that tax liability of up to 5.4% to employers who pay state taxes timely under an approved state UI program. In states meeting the specified requirements such as New Jersey and Pennsylvania, employers pay an effective Federal tax of 0.6%, or a maximum of $42 per covered employee, per year.

When a state has an outstanding loan balance on Jan. 1 for two consecutive years and does not repay the full amount of the loan by Nov. 10 of the second year, the federal government will reduce the FUTA credit until the state repays the loan. The reduction schedule is 0.3 percent for the first year and an additional 0.3 percent for each succeeding year until the loan is repaid. New Jersey and Pennsylvania are both in the first of year of the reduction schedule so the credit reduction is 0.3 percent retroactive to the beginning of 2011. The maximum cost to the employer for the credit reduction in 2011 is $21.

The U.S. Department Labor won't likely notify states of the reduced credit for 2012 until November. Employers in credit reduction states should plan on increased FUTA taxes in 2012 unless a state pays off the loan.

If you have any questions or would like more information, please contact Fred Schutz at 856-722-5300 ext. 201 or Dave Gill at ext. 210.

<< Back to Newsletter 

Published by Haefele Flanagan

Copyright © 2012 Haefele, Flanagan & Co., p.c.. All rights reserved.
 IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties or (ii) promoting, marketing or recommending to another party any tax-related matters addressed in this communication. Confidentiality Notice: This Email and any files transmitted with it are intended only for the use of the addressee and may contain information that is legally privileged and confidential. It is soley for use by the individual for whom it is intended, even if addressed incorrectly. If you are not the intended recipient, you are hereby notified that any dissemination of this communication is strictly prohibited and are asked to please notify the sender and delete it from your system. Thank you for your compliance.