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Reduction in 2011 FUTA Credit for Pennsylvania

Employers pay federal and state unemployment insurance taxes on wages paid. The Federal Unemployment Tax (FUTA) rate was 6.2% for the period 1/1/11 - 6/30/11 and was reduced on July 1, 2011 to 6.0%. A credit of up to 5.4% is allowed against FUTA for state unemployement insurance (UI) taxes, making the effective FUTA tax rate 0.6% generally for the second half of 2011 and going forward.

However, the credit for state UI taxes is subject to reduction in states with outstanding loan balances for federal loans used to fund unemployment benefits. The US Department of Labor determines in November of a given year which states will have a reduced credit for that calendar year. The states lose 0.3% of the credit for each year the loans are outstanding in excess of two years.

The IRS has now issued Form 940 for 2011, which identifies the 21 states and US possessions subject to FUTA Credit reduction in 2011, and Pennsylvania is on the list, with a 0.3% reduction in the 2011 credit. If Pennsylvania has federal loans outstanding as of the 2012 credit determination date, in November of next year, then employers in Pennsylvania will see a 0.6% reduction in the 2012 credit.

The credit reduction has no impact on FUTA tax deposits during the first three quarters of the year. These deposits are made based on an effective FUTA tax rate of 0.6% applied to the maximum FUTA wage base ($7,000 per employee).

The reduction in the FUTA credit is considered to be a fourth quarter liability, and is paid or deposited with your fourth quarter payment, due January 31, 2012 for the fourth quarter of 2011. Therefore, the additional .3% FUTA tax due to the 2011 credit reduction is due January 2012 on the full amount of the 2011 FUTA wages.

If the Federal loans to Pennsylvania remain unpaid in 2012, an additional .6% FUTA tax will be due in January of 2013 for the 2012 credit reduction.


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