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Employers may need to track pre- and post 6-30 FUTA taxable wages

Unless Congress takes action soon, the .2% federal unemployment tax (FUTA) surtax will expire effective July 1, 2011. An IRS spokesperson has indicated that if the surtax is not extended, employers will need to separately track FUTA taxable wages paid before July 1, and FUTA taxable wages paid after June 30.

Background. Under Code Sec. 3301(1) , the 0.2% FUTA surtax is scheduled to expire on June 30. The surtax is part of the 6.2% gross unemployment tax rate that employers pay on the first $7,000 of wages paid annually to each employee (6% permanent tax rate, 0.2% temporary surtax). The surtax has been in effect in every year since ’76, when it was enacted by Congress on a temporary basis. Unless new legislation is enacted, the FUTA tax rate, before consideration of state unemployment tax credits, will drop to 6.0%, effective July 1, 2011.

Necessary actions if surtax isn’t extended. On the June 2 payroll industry conference call, Sherry Saucerman, IRS Tax Analyst, noted that employers will need to separately track FUTA taxable wages
paid before July 1, and FUTA taxable wages paid after June 30, if legislation is not enacted to extend the surtax.

Anita Bartels, Senior Program Analyst, IRS SB/SE Employment Tax Operations, said that IRS will need to revise Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, if the surtax
is not extended. She said that the revision would probably be handled in a similar fashion to the way that Form 941 for the 2011 tax year was revised to reflect the reduction in the employee Social Security tax rate from 6.2% to 4.2%. That is, an additional line would be added to Form 940 to compute FUTA taxable wages earned from July 1 to December 31 that would not take into account the surtax.

IRS is working on making this change just in case the surtax is not extended, but they noted that there is considerable speculation that the surtax will be extended. Bartels believed that Form 940 would not be revised to reflect this change if the surtax was reinstated anytime before the end of the year. She was less certain how IRS would handle the federal unemployment tax computation if the surtax was to be reinstated after Dec. 31, 2011. On the last conference call, Shelley Dockstader, National Account Manager in IRS Electronic Tax Administration, said that employers will not be penalized for making unemployment tax deposits for the third and fourth quarters of 2011 that didn’t take into account the surtax, if the surtax was retroactively reinstated after the end of the fourth quarter.

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