FUTA Tax Credit Reduction – 2017 Year End Surcharge
The Federal Unemployment Tax Assessment (FUTA), is a federally generated unemployment tax that creates a Federal trust fund to cover the cost of unemployment insurance over and above what the states pay out. There is a little known secret to the FUTA tax, and one that might surprise you at the end of the year if you are not prepared. Read on to learn how you can prepare your business for an inevitable expense at the end of the year.
Background
The FUTA tax rate is actually 6.0% of the first $7000 of wages in a calendar year. Each state is then provided an offsetting credit in the amount of 5.4% which reduces the effective tax to .6%, or $42 per employee per year. However, when a state exceeds their unemployment reserve, that state must borrow from the federal government. The debt is paid back through the FUTA tax, but at .6% it usually isn’t enough to pay back any debt fast enough. So, the federal government then decreases the FUTA Tax credit each year .3% until the debt is paid back. If you are still perplexed, you can find more informaiton here: Cal Chamber.
California Dreaming
California has a had a large deficit with the Federal government for unemployment insurance and has been in the process of paying it back for 7 years. The result is a consistently growing net FUTA rate since 2011. The rate for 2016 was 2.4% and will be 2.7% for 2017.
Good news however, the federal government is showing that he debt will be paid off at the end of 2017 so 2018 should be back to normal.
Year End Surprise
Here’s where the challenge comes in. Most payroll companies and payroll software systems charge the base rate of .6% on the first $7000. They only charge the base rate because the final FUTA rate does not get published officially in November of each year. At that point, the only way to accurately pay the additional FUTA above the .6% is to charge the additional rate on all employee’s wages up to $7000. The tax is due in January so usually the charge will hit employers after the last payroll of 2017 is processed or first thing in January. Infinium Payroll and HR charges this tax on the last payroll of the year, all clients are notified 30 days in advance.
Be Prepared
The additional amount you need to be prepared for is $147 per employee. For a 10 employee company, that’s a $1470 year-end surprise! It’s best now to begin banking the additional funds you will need.
If you have any questions, please don’t hesitate to contact Infinium HR at info@infiniumhr.com.