Come Jan. 31, employers in 20 states (plus the Virgin Islands) must deposit higher-than-usual Federal Unemployment Tax Act (FUTA) taxes with their Form 940, Employer’s Annual Federal Unemployment (FUTA) tax return.

That’s because with high jobless rates, many states’ unemployment insurance trust funds were depleted. To continue paying benefits to those out of work, many states took on federal loans.

When some states couldn’t pay them back for at least two years, by the repayment deadline of Nov. 10, 2011, they became what’s known as “credit reduction states.” The associated, additional FUTA tax escalates annually, generally 0.3% per year, until states repay their loans.

Employers doing business in a credit reduction state will pay an extra 0.3% in FUTA tax — or $21 per employee — for 2011. (That’s 0.3% up to the $7,000 taxable wage base.) So, the usual credit of 5.4%, reduced by 0.3%, leaves a 5.1% maximum credit for the first year.

Note that the FUTA tax rate dropped by 0.2%  last July 1. It’s now 0.6% of wages paid, up to the $7,000 taxable wage base. That translates to $42 per employee per year.

The FUTA rate reduction partially offset 2011 FUTA credit reduction assessments, but complicated the Form 940 somewhat by assessing different tax rates on wages paid through June, and wages paid from July 1 through Dec. 31, 2011.

You’ll find a list of the credit reduction states here.

Tags: Federal Unemployment Tax Act, Form 940, FUTA, unemployment insurance