Federal Unemployment Tax Act (FUTA) Tax Increases on Wages Employers Paid in 2011 (Updated November 23, 2011)

Because the state has relied on a federal loan to pay regular Unemployment Insurance (UI) benefits for two straight years, California employers will see an increase in their FUTA taxes in January 2012 for wages paid to their workers in 2011.

Tax Changes and Information

Current federal law provides employers with a 5.4 percent FUTA tax credit. However, this credit will be reduced by 0.3 percent to 5.1 percent for the 2011 tax year due to the outstanding federal loan. For each employer in California, that works out up to an additional $21 per employee, per year.

The demand for unemployment benefits has been unprecedented through the course of the long and difficult recession and the state’s UI Trust Fund now has a deficit of more than $9 billion. The continuing federal loan has helped cover the cost of regular unemployment benefits.

California employers fund regular benefits through contributions to the state’s UI Trust Fund on behalf of each employee, and they pay separate FUTA taxes to the federal government to help pay for the administration of the UI program.

Those FUTA contributions also pay for UI loans to insolvent states, and federal extension benefits. Any additional employer FUTA contributions are used to help repay the state’s federal UI loan.

Without any change in the state’s UI funding structure, FUTA costs for California employers are anticipated to increase by an additional 0.3 percent each year until the UI Trust Fund regains solvency.

Additional Information

If you have questions on the FUTA credit reduction, Form 940, or Publication 15(2011) (Circular E) Employer’s Tax Guide, please contact the IRS through the IRS website.

Check out the IRS Schedule A (Form 940) for 2011, employers will use to calculate the FUTA tax.