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Federal Unemployment Tax Act (FUTA) Increases for 2012 – 2013

Background:

Almost all private sector employers pay federal and state unemployment insurance taxes on wages paid.  The federal tax is normally 6%, however, in the State of California employers receive a credit of 5.4% for payments made for state unemployment insurance (UI) taxes.  Thus making the effective Federal tax rate .6% on the first $7,000 paid to each employee.

The Problem:

When a state UI funds are depleted (as they are currently depleted in California), the state draws from a Federal loan account.  If such loans are not repaid within two years, the Federal government thereby increases the percentage of FUTA tax paid by the employer.  The Federal government does not notify the state as to the increase until the end of the year, which is why many employers are paying large tax balances at the end of the year.

Example:

An employee has worked for your company all year in 2012 earning wages of $30,000.  Your company paid in 2012, $42 of FUTA tax ($7,000 x 0.6%) on the first 7,000 earned by the employee.  Here is where the surprise comes! Because the State of California has failed to repay the Federal government loan, your company will pay an additional 0.6% on the first $7,000 earned by the employee, raising the effective FUTA tax total to $84.

Due to the tax increase not being accessed until the end of the year explains why your company has been assessed additional taxes due on January 31, 2013.

What to Expect for 2013:

Employers in the State of California can expect the same increase in FUTA tax for the year of 2013.  This means that again additional FUTA tax could be assessed and payable in January 2014.

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