Employers that operate in states that borrowed funds from the federal government to supplement their state unemployment benefits during the recession, but which have not yet returned the funds, will see a increased tax bills this year.
Employers typically pay a 6 percent federal unemployment tax (FUTA) on employee wages up to $7,000. Employers are then able to offset the 6 percent federal tax with a 5.4 percent credit for state unemployment taxes paid. However, employers will see this credit typically used to offset their federal unemployment tax collections reduced from 5.4% to 5.1% on their 2011 tax returns, if their state has not yet repaid borrowed federal funds, according to a newly released bulletin from the IRS.
The IRS released a bulletin last month listing the 21 “credit reduction” states. These “credit reduction” states are listed below; employers in most of these states will be limited to a 5.1 percent credit against FUTA taxes for 2011.
| States | Reduction Rate |
|---|---|
| Arkansas | .003 |
| California | .003 |
| Connecticut | .003 |
| Florida | .003 |
| Georgia | .003 |
| Illinois | .003 |
| Indiana | .006 |
| Kentucky | .003 |
| Michigan | .009 |
| Minnesota | .003 |
| Missouri | .003 |
| Nevada | .003 |
| New Jersey | .003 |
| New York | .003 |
| North Carolina | .003 |
| Ohio | .003 |
| Pennsylvania | .003 |
| Rhode Island | .003 |
| Virginia | .003 |
| Virgin Islands | .003 |
| Wisconsin | .003 |
Employers in these states must use the Schedule A (Form 940) (PDF) to compute the credit reduction and attach the Schedule A to their Form 940. More information on the credit reduction, including an example on how to calculate the credit reduction is on the Schedule A (Form 940) and also in the Instructions for Form 940 (PDF).
Tags: credit reduction, federal, futa, IRS, unemployment