Will This FUTA Tax Cut for Businesses Be Temporary or Permanent?
Last week on July 1, 2011, a "temporary" Federal unemployment surtax of 0.2% expired and reduced the Federal Unemployment Tax, (commonly known as the FUTA tax) for employers. Although, no employee will directly benefit from this payroll tax reductions it does help businesses.
Every employer has to pay FUTA and SUTA (State Unemployment taxes for employers). The FUTA tax rate was 6.2%. the expiration of the surtax reduced the FUTA rate to 6.0% on the first $7,000 of wages you pay to each employee. Most employers do not pay that rate, since they receive a state unemployment tax credit that is applied against the FUTA tax rate.
An employer can receive a maximum credit of 5.4% on the State unemployment taxes paid, thus reducing the FUTA tax rate by up to 5.4%. For those receiving the maximum credit, their new FUTA rate will be 0.6% on the first $7,000 of wages earned by each employee.
On each employee that you pay $7,000 or more in wages, the savings will be $14 per year. Even for a small business, such as a restaurant, that requires 30-40 employee to operate and has to hire 70 employees during the year, the savings at $14 per employee can add up to almost $1,000.
However, don't budget the extra savings just yet. This "temporary" surtax was enacted in 1976 to fund extensions of unemployment benefits (sound familiar) and has been extended over the past 25 years by both Republicans and Democrats.
It is unclear whether they will reenact the surtax as is, leave it or increase the wage limit that is subject to the surtax. (President Obama, in his 2012 budget proposal, included raising the wage limit, subject to FUTA taxes, from $7,000 to $15,000 starting in 2014).
Given the strain placed on unemployment benefits over the past several years, businesses should not be surprised to see the FUTA rate or the SUTA tax rate increase, despite the harm it can do to businesses looking to hire.
Barbara Weltman in her blog has a good summary of the issue and history of the FUTA surtax. 