Companies in 18 states and the U.S. Virgin Islands will have to pay more in federal unemployment taxes when they file IRS Form 940 for 2012, according to the U.S. Department of Labor. And that may point to higher contingent labor prices in the future. Some staffing firms have already warned customers of increases.
Businesses in those states are losing a portion of their standard tax credit on FUTA. The reduction comes because those states have unpaid balances on funds borrowed from the federal government to pay unemployment benefits.
The FUTA rate is 6.0 percent on the first $7,000 of wages. However, employers generally receive a credit of 5.4 percentage points, for an effective tax rate of 0.6 percent.
That FUTA credit is reduced by 0.3 percent-points each year a state has two or more years of unpaid borrowings as of Jan. 1, according to the IRS. The credit is reduced each year until state borrowing is repaid. For example, employers in a state with outstanding loans after two years would have a federal tax credit of 5.1 percent instead of the standard 5.4 percent, thus raising the effective tax rate to 0.9 percent.
“Any increased FUTA tax liability due to a credit reduction is considered incurred in the fourth quarter and is due by Jan. 31 of the following year,” according to the IRS.
Here is a list of states and their reductions (click image to enlarge):
Source: U.S. Department of Labor