Federal Unemployment Tax Act (FUTA) Tax Increases on Wages Employers Paid in 2012

Because the state has relied on a federal loan to pay regular Unemployment Insurance (UI) benefits for more than two straight years, California employers will see an increase in their FUTA taxes in January 2013 for wages paid to their workers in 2012.

Tax Changes and Information

Current federal law provides employers with a 5.4 percent FUTA tax credit. However, this credit was reduced to 5.1 percent for the 2011 tax year and will be reduced by another 0.3 percent to 4.8 percent for the 2012 tax year due to the outstanding federal loan. That amounts to an overall increase in the FUTA taxes employers pay. Over the last two years that may increase amounts up to $42 more per employee.

The demand for unemployment benefits has been unprecedented through the course of the long and difficult recession and the state’s UI Trust Fund now has a deficit of more than $10 billion. The continuing federal loan has helped cover the cost of regular unemployment benefits.

California employers fund regular benefits through contributions to the state’s UI Trust Fund on behalf of each employee, and they pay separate FUTA taxes to the federal government to help pay for the administration of the UI program.

Those FUTA contributions also pay for UI loans to insolvent states, and federal extension benefits. Any additional employer FUTA contributions are used to help repay the state’s federal UI loan.

Without any change in the state’s UI funding by the state legislature, FUTA costs for California employers are anticipated to increase by an additional 0.3 percent each year until the UI Trust Fund regains solvency.

Additional Information

If you have questions on the FUTA credit reduction, Form 940, or Publication 15(2011) (Circular E) Employer’s Tax Guide, please visit the FUTA Credit Reduction page on the IRS website.