The July 1st, 2011 Federal Unemployment Tax Act (FUTA) change

Congress has from time to time adjusted both the tax rate and amount of wages subject to FUTA taxes.  In 1983 the amount of taxable wages was set at $7,000 which is where it has remained to this day.  The effective tax rate, which began in 1939 at 0.3 percent, was raised to 0.8 percent in 1983, which included a surtax of 0.2 percent enacted by Congress in 1976.  Even though this is an annual tax reported on an annual tax return, that rate is scheduled to decrease to 0.6 percent, effective July 1st, 2011.

What this means is that the Federal unemployment tax must be reported at 0.8 percent for the wages paid first half of the year, and 0.6 percent for wages paid the second half of the year.  Because almost no payroll software was designed to handle this change, payroll software providers and payroll service bureaus will have to change their software to comply with this mid-year tax rate reduction.

UBCC will be releasing revised payroll software to clients that allows them, on a client-by-client basis to use the old 0.8 percent rate or the new 0.6 percent rate.

What seems like a straight-forward unemployment tax rate change may not necessarily be the case.  The Catch 22 for payroll service bureaus stems from information shared by the IRS in their monthly telephone conference call with payroll service bureaus informing them that the tax rate can be set back to the 0.8 percent rate if Congress passes a law.  The problem for the payroll service bureau is if you begin impounding (collecting the tax for the government) at the 0.6 percent rate on July 1st 2011, and Congress passes a law that reverts back to the 0.8 percent rate, there will be an insufficient amount of money collected to pay the tax.  If clients go out of business or declare bankruptcy during the second half of the year, there will be no business to collect the shortfall from.

In the event that Congress passes a law to revert back to the 0.8 percent rate, rather than risking an unemployment tax collection issue for your payroll service bureau, I recommend continuing to impound at 0.8 percent and issue clients a refund at the end of the year if the 0.6 percent rate continues.

More information about FUTA: http://www.irs.gov/businesses/small/international/article/0,,id=104985,00.html

This blog

Ken Garen, CPA, is the co-founder and President of Universal Business Computing Company (www.ubcc.com), a software development firm of high-volume, high-productivity accounting and payroll technology. Ken attended Oxford and Southern Illinois Universities and earned degrees in Accounting and Business Education, with a minor in photography. Ken has designed payroll and accounting software and systems since 1981, is a frequent presenter for national association CPE seminars, a contributor of editorial content for well-respected accounting publications, and speaks at state and national accounting professional events.Ken's blog postings provide readers with insight into how technology trends (i.e. Google, Microsoft, Apple, the FCC, Verizon, the Internet, Web Apps, Web security, etc.) will impact payroll and accounting professionals and business owners.

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