Human Resources News & Insights

Temporary FUTA surtax expires: Now what?

The expiration of the “temporary” 0.2% FUTA surtax on June 30 changes employers’ recordkeeping duties.

Because Congress didn’t pass an extension, now employers must track from:

  • Jan. 1 through June 30, 2011 — a net FUTA tax rate of 0.8%, and
  • July 1 and beyond – a net rate of 0.6%.

That said, there’s still a good chance Congress will pass legislation retroactively reinstating the surtax – maybe even by the August 2 deadline to raise the debt ceiling.

If not, President Obama’s Fiscal Year 2012 budget also recommends extending the tax permanently.

The timing of an extension could make this year-end especially messy. Payroll files the Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, by Jan. 31st each year, so it’s possible that Congress could reinstate the surtax at any time prior to that date.

So what happens if Congress does retroactively reinstate the surtax after the end of the fourth quarter and you only deposited at the 0.6% (instead of 0.8%) rate?

IRS offered this advice on a recent conference call with Payroll industry professionals: Compute your third and fourth quarter FUTA tax deposits (applicable to employers whose FUTA tax tops $500 for the calendar year), at the 0.6% rate.

That way, you won’t face deposit penalties for the shortfall in the third and fourth quarters should Congress make a retroactive change, said IRS’ Shelley Dockstader, Electronic Tax Administration. Although the agency has no say in whether the surtax gets extended, IRS will have some mechanism in place to rectify that problem, she said.

The “temporary” 0.2% surtax, instituted in 1976, was part of the 0.8% net unemployment tax rate on the first $7,000 paid to each employee as wages during the year. Employers stop depositing FUTA tax on an employee’s wages when the person reaches $7,000 in taxable wages for the calendar year.

Note, though, that if the FUTA tax liability for any calendar quarter is $500 or less, employers don’t have to deposit the tax. Instead, they may carry it forward and add it to the liability figured in the next quarter to see if a deposit must be made.

We’ll keep you posted.  You can also get more info here.

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