June 30, 2011

FUTA Tax Rate Scheduled to Decrease Beginning July 1, 2011

Related Service Tax & Business

FUTA Tax Rate Scheduled to Decrease Beginning July 1, 2011 Tax & Business

The Federal Unemployment Tax Act (FUTA), together with state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs. Most employers pay both a Federal and a state unemployment tax.

Before July 1, 2011, the FUTA tax rate is 6.2%. After June 30, 2011, the FUTA tax rate is scheduled to decrease to 6.0%. The tax applies to the first $7,000 of wages paid to each employee during the calendar year.

Employers can take a credit for amounts paid to state unemployment funds for as much as 5.4%. The net FUTA tax rate is generally 0.8% (6.2% – 5.4%) and is scheduled to decrease to .6% (6% – 5.4%).

Only the employer pays FUTA tax; it is not deducted from the employee’s wages. Employers will need to make sure this reduced rate is used to calculate future FUTA tax deposits and properly report the tax on the 2011 IRS Form 940.

The FUTA reduction also applies to household employees. A list of state unemployment tax agencies, including addresses and phone numbers, is available in Publication 926, Household Employer’s Tax Guide.

Further information can be found in the IRS Publication 15, Circular E.

Please contact your Marcum LLP tax representative today to find out more about these types of transactions.

A special thanks to article contributors Diane Giordano, Partner, Tax & Business Services, Marcum LLP and Lisa Mark, Sr. Sales Consultant, Paychex, Inc.