Question

To compute the Federal Unemployment Tax, the credit against the tax, and any credit reductions that might apply, employers are required to use a floating scale. This scale for SUTA is 6.0% of the first $7,000 of earnings, 5.4% credit (for SUTA taxes paid) = 0.6 percent of net FUTA rate. The experience ratings set in SUTA rate for each employer based on the past employment record. Suppose this process could be erased and a new one could be created. What do you suggest for the process? What do you think would be a better system for determining the employer's SUTA tax rate?

Answer 1

Under the provisions of the Federal Unemployment Tax Act (FUTA), a Federal tax is levied on covered employers at a rate of 6.0 percent on wages up to $7,000 per calendar year paid to a worker in covered employment. The law, however, provides a credit against Federal tax liability of up to 5.4 percent to employers who pay state taxes timely under an approved state UI program. This credit is allowed regardless of the amount of the tax paid to the state by the employer. Accordingly, in states meeting the specified requirements, employers pay an effective Federal tax of 0.6 percent or a maximum of $42 per covered worker, per year. The Federal tax is not levied on workers.

The Unemployment Trust Fund in the Federal unified budget contains a separate account for each of the States, the District of Columbia, the Virgin Islands, and Puerto Rico. These 53 jurisdictions deposit their respective unemployment taxes in their accounts and withdraw funds to cover the costs of regular State benefits and half of the extended benefits program. Three additional Federal accounts are for administration, extended benefits, and loans to States; they are funded by the Federal unemployment tax.

All employers covered by the FUTA are charged 6.0% of the first $7,000 annually for each worker’s covered wages. However, employers do not actually pay the full amount because they credit toward their Federal tax the payroll tax contributions that they paid into a State unemployment insurance program. Their credit may also include any savings on the State tax achieved under an approved experience rating plan, as described below.

The credit available to employers in a State may be reduced if the State has fallen behind on repayment of loans to the Federal Government. Many States have taken out such loans when their reserves were depleted during periods of high unemployment. These loans to States had been interest free, but beginning April 1982, interest has been payable except on certain short-term “cash flow” loans.

Effective January 1985, the total credit may not exceed 5.4% of taxable wages. The remaining 0.6% is collected by the Federal Government. The permanent 0.6% portion is used for the expenses of administering the unemployment insurance program for the 50% share of the costs of extended benefits, and for loans to States. Any excess is distributed among the States in proportion to their taxable payrolls.

Computing the tax. The FUTA tax is imposed at a single flat rate on the first $7,000 of wages that you pay each employee. Once an employee’s wages for the calendar year exceed $7,000, you have no further FUTA liability for that employee for the year.

The FUTA tax rate is 6 percent. That is the tax rate that applies to the first $7,000 in wages paid to each of your employees during the year.

Credit for state unemployment taxes. You can generally claim credits against your gross FUTA tax to reflect the state unemployment taxes you pay. If you paid all your state unemployment taxes on time, and before the due date of your FUTA tax return, you’ll be allowed to claim a credit equal to 5.4 percent of your federally taxable wages. This will effectively reduce the FUTA tax rate to 0.6 percent..