The Federal Unemployment (FUTA) Credit Reduction
Under Title XII of the Social Security Act, states with financial difficulties can borrow funds from the federal government to pay unemployment benefits. However, if a state defaults on its repayment of the loan, the federal government reduces the FUTA credit to that state. This state credit of 5.4% normally reduces the FUTA rate from 6.0% of taxable wages to 0.6% of taxable wages.
The credit is reduced by 0.3% of taxable wages beginning with the second consecutive January 1 in which the loan isn't repaid, then an additional 0.3% of taxable wages annually thereafter. Thus, the net FUTA tax rate paid by an employer in a state that has had an unpaid loan with the federal government for two consecutive years will be 0.9%, which is 50% higher than the net 0.6% rate used by employers in states without a past due loan. The net FUTA tax rate continues to rise 0.3% of taxable wages for each additional year that the loan remains unpaid as of November 10 of that year.
Wisconsin is one of the states that has defaulted on its repayment of the loan in 2011 and is expecting the same for 2012. Accordingly, the FUTA rate will be higher in 2012 for wages applicable to Wisconsin employees. The 2012 FUTA rate will increase to 1.2%, which represents a reduced state credit of 4.8%.
The additional 2012 FUTA tax that is due because of the reduced state credit should be paid with your 2012 4th quarter deposit which is due January 31, 2013.
Special Interest Assessment on Employers
The interest associated with the federal loans mentioned above is paid with a special assessment on employers. The Wisconsin Department of Workforce Development (DWD) recently mailed a letter to employers regarding this special assessment. A sample of the mailing is on the DWD website, along with answers to several frequently asked questions on this issue.
The 2012 assessment is 0.0806% of the first $13,000 of each employee’s wages earned in 2011 or up to $10.48 per employee (which is down from $26.99 for the 2011 assessment) for taxable employers. For reimbursable employers, the rate is 0.0605% of the first $13,000 of each employee’s wages earned in 2011.
The State of Wisconsin needs to collect the funds necessary to make the September 30, 2012 interest payment. The consequences of not making the interest payment when due include withheld federal unemployment compensation benefits and the loss of certification for the state’s unemployment program, causing employers to no longer be eligible for the 5.4% credit against the FUTA tax. The special assessment is due to the DWD on September 17, 2012.
The State expects similar special assessments in 2013 and 2014, when the federal loan is expected to be repaid.
If you are a payroll client of Schenck, we can assist you with making your assessment payments as part of our payroll services.
For more information, contact Amy Bradley, Payroll Specialist, or your Schenck account director at 800-236-2246.