Thirty-five Year Old Temporary FUTA Surtax Expires

By Marcia Richards Suelzer, Toolkit Staff Writer

Beginning July 1, 2011, the 35 year old, "temporary" FUTA surtax finally lapses and the federal unemployment tax rate drops from 6.2 percent to 6.0 percent on the first $7,000 of an employee's wages.

Tip. Although the federal tax rate is 6.0 percent for wages paid after June 30, few employers will actually need to pay over this amount to the federal government because there is a credit against the FUTA tax for amounts paid into a state employment tax system.

For most employers, this credit is 5.4 percent of the FUTA taxable wages. Thus, the effective federal tax rate is only 0.6 percent of the first $7,000 wages. You are entitled to the maximum credit if you paid your state unemployment taxes in full, on time, and on all the same wages as are subject to FUTA tax, and as long as the state is not determined to be a credit reduction state. For additional information consult the Instructions for Form 940.

The rate reduction is not retroactive. You will calculate your liability for the first two quarters of 2011 using the 6.2 percent rate. Your liability for the second two quarters is determined using the 6.0 percent rate.

Example. On June 6, 2011, Plywood Sailboats, LLC hired a new employee whose wages are $1,000 per week. The FUTA tax on this employee's wages will be calculated at 6.2 percent for the payments in June. Wages paid after June 30 will be taxed at 6.0 percent, until the $7,000 ceiling is reached.

Unlike social security taxes, the FUTA tax is paid entirely by the employer. No portion is withheld from the employee's paycheck. Most employers are required to pay federal employment tax. You are required to pay the tax if you meet either of these two tests:

• you paid wages totaling $1,500 or more in any calendar quarter in 2010 or 2011, or
• you employed one or more individuals for at least some part of a day in each of 20 weeks during 2010 or 2011.

Agricultural employers and household employers have different qualifying tests. These can be found in the IRS Publication 15, Circular E, Employer's Tax Guide.

Tip. Most of the major payroll processing companies and software providers anticipated the drop in the tax rate and have updated their software accordingly. For example, the update for Intuit's Quick Book users was available in mid-June. Contact your vendor to ensure that you have the latest version of their software.

Posted July 1, 2011.