Maximum Credit Allowable - This is the most credit an employer can take for fully and timely reporting state unemployment taxable wages, and fully and timely paying the state unemployment taxes. Assuming an employer has fully and timely reported all its state unemployment wages to the respective state agencies, and has fully and timely paid all its state unemployment taxes, the net FUTA rate of 0.8% should apply, instead of the gross rate of 6.2%. As of 2000, Indian Tribes are exempt (click this link for IRS FAQ on FUTA). Refer to the Form 940 instructions for details on how to compute the tax. For general information on FUTA click this link for IRS SmlBus WrkShp.

 

Additional Credit - An employer is given a dollar for dollar credit for taxes paid timely to a state unemployment agency.  But if the experience (tax) rate for a given state is less than 5.4%, that means the total tax paid to the state may not add up to the Maximum Credit Allowable.  That is where the Additional Credit comes in.  It is the difference between 5.4% less the experience rate, times the state unemployment taxable wages.  Basically, it is the credit given for having an experience rate that is less than 5.4%.  Therefore, assuming a state taxable wage limit of $7,000 (same as the federal), the taxes fully and timely paid to the state, plus the Additional Credit, should equal the Maximum Allowable Credit of 5.4% of $7,000 in FUTA wages.  A low experience rate increases the Additional Credit.  A high state wage base has the effect of inflating the Additional Credit, potentially enough to account for the full Maximum Allowable Credit.

 

Tentative Credit - The credit for unemployment taxes paid timely to the state(s), plus the Additional Credit.  Add 90% of any additional taxes paid to the state(s) after the due date.  This is the amount of credit potentially available.

 

Allowable Credit - The lesser of the Maximum Allowable Credit or the Tentative Credit.

 

Credit Reduction - When a state unemployment fund has to borrow funds from the federal government to pay unemployment benefits, and it is unable to repay the loan to the federal government, the amount of credit employers in the affected state can take against their gross FUTA rate, as described above, is reduced.  For the 2004 tax year, New York employers had a credit reduction of 0.3%, meaning their Allowable Credit was reduced by 0.3% for their New York taxable wages.  Put another way, the maximum credit an employer can claim for New York wages in 2004 is 5.1%, not 5.4%.  For tax year 2005, New York's credit reduction rate was increased to 0.6%, reducing their Maximum Allowable Credit to 4.8%

 

 

Federal Unemployment wage and tax limits, and tax rates, have not changed for many years (though what wages qualify as subject to FUTA have). For 2005, the only noted change is the increase in the minimum threshold of tax due before a quarterly payment of tax must be made to the IRS. Through 2004, employers are required to make a quarterly deposit for unemployment taxes if the accumulated tax exceeds $100. Effective January 1, 2005, this threshold has been increased to $500, which will eliminate some quarterly deposits for some employers.