New Changes for Form 940 (Federal Unemployment Tax)

December, 2009

The FUTA tax rate was scheduled to decrease from 6.2% to 6.0% in 2010, when the 0.2% FUTA surtax was set to expire. However, the Worker, Homeownership, and Business Assistance Act of 2009 includes a provision extending the surtax and the current 6.2% rate for 18 months, through June 30, 2011.  Keep in mind, if you pay your state unemployment tax on time each quarter, you are allowed a 5.4% credit leaving you with a net FUTA tax of 0.8%. 

Credit reduction states: A state that has borrowed money from the federal government and has not repaid the money it borrowed by November 20th of the following year is a "credit reduction state." If an employer pays wages that are subject to the unemployment tax laws of a credit reduction state, that employer must pay additional federal unemployment tax when filing its Form 940.  The US Department of Labor reports as of November 20, 2009, the states with outstanding loans are Alabama, Arkansas, California, Connecticut, Florida, Idaho, Illinois, Indiana, Kentucky, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, South Dakota, Texas, Virgin Islands, Virginia, and Wisconsin.

For 2009, Michigan is the only state classified as a credit reduction state. If you paid any wages that are subject to the unemployment compensation laws of the state of Michigan, you are not allowed 0.3% of the regular 5.4% credit. Use Schedule A (Form 940), Part 2, to compute the additional tax. Unless the loans are paid by November 20, 2010, for all the other states listed above, more states could be added to the list of "credit reduction states” in 2011.

If your organization currently processes payroll internally, you may want to check out Cascade's new Web-based payroll processing system through E-chx.  This system can greatly simplify the process and save you time and money.


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