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FUTA Tax Rate Change for NC Employers

Jan 4, 2013

FUTA is a Federal tax imposed on employers to fund unemployment compensation. The FUTA tax rate is 6.0% and is applied to wages up to $7,000 paid to an employee.

In certain states, employers actually pay FUTA at a rate of 0.6% due to a credit provided in the Federal tax law. A credit against the FUTA tax liability of up to 5.4% is available to employers paying state unemployment taxes timely under an approved state unemployment insurance program. In the past, North Carolina employers have been able to take advantage of the 5.4%credit.

In 2011, the credit was reduced for North Carolina, as well as a number of other states. The credit against the FUTA tax may be reduced if the state has an outstanding loan from the Federal government. States may take loans from the Federal government if there is a lack of funds to pay unemployment benefits. When a state has such a loan outstanding on January 1 for two consecutive years, and the loan is not repaid by November of the second year, the FUTA credit for employers in that state will be reduced until the loan is repaid. The credit is initially reduced by 0.3% and is reduced by an additional 0.3% for each succeeding year until the loan is repaid. Beginning with the third year, additional reductions may be made to the FUTA tax credit.

2011 was the first year that North Carolina employers experienced a reduction in the FUTA tax credit (down from 5.4% to 5.1%), due to North Carolina’s outstanding Federal loans related to the payment of unemployment benefits.  Those Federal loans were still outstanding in November 2012. As a result, the FUTA tax credit available to North Carolina employers has now been reduced again to 4.8%. The effective FUTA tax rate for North Carolina employers is 1.2% for all of 2012.  Any additional FUTA tax owed for 2012, due to the credit reduction, must be paid in January 2013 with Form 940 (Employer’s Annual FUTA Tax Return).