NJ and PA Employers Hit With FUTA Tax Credit Reduction

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December 13th, 2011 by Noam Yalon

While Congress debates how to enact payroll tax cuts to stimulate the floundering economy, New Jersey and Pennsylvania employers are suddenly facing higher payroll taxes. Under the provisions of the Federal Unemployment Tax Act (FUTA), a Federal tax is levied on employers covered by the Unemployment Insurance (UI) program at a current rate of 6.2% on wages up to $7,000 a year paid to an employee. The law provides for a credit against that tax liability of up to 5.4% to employers who pay state taxes timely under an approved state UI program. In states meeting the specified requirements such as New Jersey and Pennsylvania, employers pay an effective Federal tax of 0.8%, or a maximum of $56 per covered employee, per year.

The credit against the federal tax may be reduced if the state has an outstanding UI loan. Since the recession many states have lacked the funds to pay unemployment insurance benefits and have exercised their ability to obtain loans from the federal government. To assure that the states repay these loans, the federal government partially recovers those monies by reducing the FUTA credit it gives to employers, which is the equivalent of an overall increase in the FUTA tax. When a state has an outstanding loan balance on Jan. 1 for two consecutive years and does not repay the full amount of the loan by Nov. 10 of the second year, the federal government will reduce the FUTA credit until the state repays the loan. The reduction schedule is 0.3 percent for the first year and an additional 0.3 percent for each succeeding year until the loan is repaid. New Jersey and Pennsylvania are both in the first of year of the reduction schedule so the credit reduction is 0.3 percent retroactive to the beginning of 2011. Adding to the confusion is that a longstanding FUTA surcharge of 0.2% expired on June 30, 2011. This means that the effective FUTA rate for employers decreased from 0.8% to 0.6% starting on July 1, 2011. The chart below illustrates that the additional tax could be up to $21 per year per employee.

Maximum Tax per Employee Before Credit Reduction January through June Rates					Maximum Tax per Employee Before Credit Reduction July through December Rates
	Wage Base	Effective Rate	Maximum Annual Tax			Wage Base	Effective Rate	Maximum Annual Tax
NJ	7,000	0.80%	56		NJ	7,000	0.60%	42
PA	7,000	0.80%	56		PA	7,000	0.60%	42
Maximum Tax per Employee After Credit Reduction January through June Rates					Maximum Tax per Employee After Credit Reduction July through December Rates
	Wage Base	Effective Rate	Maximum Annual Tax			Wage Base	Effective Rate	Maximum Annual Tax
NJ	7,000	1.10%	77		NJ	7,000	0.90%	63
PA	7,000	1.10%	77		PA	7,000	0.90%	63

Meanwhile the states are imposing increased rates, interest assessments, higher wage bases or surcharges at the state tax level in an attempt to make their plans solvent. Please contact us if you have any questions.

2011 FUTA Tax Rate Summary of State's with a Credit Reduction
State	Credit Reduction	Effective Rate Jan - Jun	Effective Rate Jul - Dec
Arkansas	0.30%	1.10%	0.90%
California	0.30%	1.10%	0.90%
Connecticut	0.30%	1.10%	0.90%
Florida	0.30%	1.10%	0.90%
Georgia	0.30%	1.10%	0.90%
Illinois	0.30%	1.10%	0.90%
Indiana	0.60%	1.40%	1.20%
Kentucky	0.30%	1.10%	0.90%
Michigan	0.90%	1.70%	1.50%
Minnesota	0.30%	1.10%	0.90%
Missouri	0.30%	1.10%	0.90%
Nevada	0.30%	1.10%	0.90%
New Jersey	0.30%	1.10%	0.90%
New York	0.30%	1.10%	0.90%
North Carolina	0.30%	1.10%	0.90%
Ohio	0.30%	1.10%	0.90%
Pennsylvania	0.30%	1.10%	0.90%
Rhode Island	0.30%	1.10%	0.90%
Virginia	0.30%	1.10%	0.90%
Wisconsin	0.30%	1.10%	0.90%