Q: What is the FUTA tax credit?
A: Employers are required to submit annual Federal Unemployment Tax Act (FUTA) tax payments in addition to their quarterly state unemployment insurance (UI) tax payments. The FUTA tax rate is 6.2%, and under normal conditions employers who pay their state UI taxes in a timely manner receive a credit of up to 5.4% toward their FUTA taxes, so they pay their FUTA tax at 0.8%. For additional information, see our brochure IA318.10 – Relationship of NYS and Federal UI Tax Reporting on our web site under “Doing Business in NY” or pick up a copy at any of our offices.
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Q: What will the FUTA tax credit be for 2006?
A: The reductions to the FUTA Tax Credit to repay Federal loans to the Unemployment Insurance (UI) Trust Fund that New York employers have experienced in 2004 and 2005 will be restored for 2006. The previous reductions to this credit were based upon Federal Law which requires employers in credit reduction states to pay additional FUTA taxes.
The current FUTA tax rate is 6.2%. Since New York's Trust Fund will have a positive balance after employers make UI contributions due at the end of April 2006, the normal tax credit of 5.4% for employers who pay their state tax in full and in a timely manner will be restored for 2006. As a result, such employers will pay 2006 FUTA taxes at the rate of .8%
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Q: Why are New York employers receiving a reduced credit for 2005?
A: Due to economic conditions caused by the effect of the prolonged national recession and the September 11 attacks, New York, as well as many other states, had to borrow money from the federal government in order to meet UI benefit obligations. Usually there are sufficient reserves from quarterly state UI taxes to repay the federal loan. However, there have been insufficient reserves to repay the federal loan. Federal law requires a reduction in the FUTA tax credit when a federal loan taken to meet unemployment insurance benefit obligations is not repaid within two years. For 2005 the state’s employers will not receive the full 5.4% credit toward their FUTA tax, but will receive a maximum credit of 4.8%, thus paying their FUTA tax at 1.4%.
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Q: What employers are not affected by the FUTA tax credit reduction?
A: Non-profit organizations, governmental employers and Indian tribes are not liable for the FUTA tax. Any employer not required to pay FUTA taxes is not affected by the credit reduction.
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Q: Where does this money go?
A: Normal FUTA taxes go toward the administration of states’ UI programs. The extra 0.3% paid in 2004 by New York employers will go toward reducing the outstanding loan balance New York has with the federal government.
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Q: Wasn't the Interest Assessment Surcharge for this purpose?
A: No, the IAS was necessary because interest was due on the outstanding loan amounts and needed to be paid by a certain date in order to avoid other negative consequences for the state’s employers.
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Q: Why can't I use form 940 EZ?
A: Since New York employers are subject to the reduced credit, the simplified Form 940EZ, which some New York employers could previously file, cannot be used since it cannot accommodate the reduced credit. Those employers will need to file Form 940 for 2004. For additional information, please contact the IRS at 1-800-829-4933.
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