Federal Unemployment Tax Act Surtax Expired June 30, 2011

Business owners received a gift from the federal government recently: the temporary 0.2% Federal Unemployment Tax Act (FUTA) surtax expired June 30, 2011.

The surtax was part of the 6.2% unemployment tax rate that employers pay to the IRS on the first $7,000 of wages paid annually to each employee. The 6.2% gross rate represented a permanent tax rate of 6% and a temporary surtax of 0.2%.

Note: There is a 5.4% credit available for employers who pay their state unemployment taxes in a timely manner. This change yielded a net tax rate of 0.8% before the expiration of the 0.2% surtax, and now yields a net rate of 0.6%.

Federal Unemployment Tax Act Surtax History

The 0.2% surtax was passed in 1976, and has been extended eight times. The surtax was most recently extended through 2010 and the first six months of 2011 by the Worker, Homeownership, and Business Assistance Act of 2009.

In his budget, President Obama proposed making the surtax permanent. Congress, however, has allowed the provision to lapse, and it is not clear whether the surtax will be reinstated, retroactively or otherwise.

Retroactive action could place employers in a difficult situation when calculating future required unemployment tax deposits (employers with an annual unemployment tax obligation exceeding $500 must deposit their taxes quarterly). The IRS has informally indicated that it will waive penalties on employers that calculate the tax at a 6% rate if Congress does retroactively reinstate the surtax.

The expiration of the Federal Unemployment Tax Act surtax is expected to reduce federal unemployment taxes by $1.4 billion per year, or about $14 per employee per year.