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2012 FUTA Credit Reduction Update

Federal Unemployment Tax Act (FUTA) Background

Employers pay federal unemployment taxes on the first $7,000 of each worker’s annual wages. The FUTA tax for 2012 is a flat rate of 6.0 percent. However, businesses that pay their state unemployment taxes on time and in full can receive up to a 5.4 percent credit if the state is not subject to any credit reductions. Therefore the net FUTA tax rate is typically 0.6 percent.

Credit Reduction: What it Means

Federal law requires a reduction in the FUTA tax credit when a state has outstanding federal unemployment loans for two years and has not made sufficient voluntary payments towards the loan. The reduction in the tax credit is 0.3 percent for the first year and an additional 0.3 percent for each succeeding year until the loan is repaid or other avoidance criteria are met.

2012 is the second year that Ohio has had an outstanding federal loan balance. The official credit reduction amount for 2012 would likely be 0.6 percent. Therefore, the net FUTA tax could be 1.2 percent for wages paid in 2012 if Ohio does not meet certain avoidance criteria.