Today is the deadline for states who borrowed money from the Federal Unemployment Account to repay their loans before they receive FUTA Credit Reductions. The Department of Labor determines the credit reduction states for each year, and will announce the states affected after the November 10th deadline has passed. Last year 20 states’ FUTA credit was reduced, and they are expecting a similar number for this year. At Cachet Banq, Inc and Payroll Tax Management, we found a few ways to make this credit reduction a more painless process, especially when many of the same states are likely to face FUTA credit reductions again.
- Collect FUTA from clients at expected credit reduction rate. Beginning with 1st quarter, 2013, collect FUTA taxes from clients at the expected higher rate, but do not remit the entire amount. Instead, remit taxes at the standard FUTA rate and hold the additional in your tax impound account. Continue to collect in this manner for each quarter in 2013. When processing Federal payroll taxes for 4th quarter 2013, you will already have the additional amount each client owes if their state ends up with a FUTA credit reduction. If their state does not end up with a FUTA credit reduction, you can simply refund the overage to your clients. Most clients will appreciate not having to come up with additional money at the last minute. Check the Department of Labor Website http://www.dol.gov/ for updates on states that face credit reductions in 2013.
- Pay extra close attention to Prepays from mid-year starts. When implementing clients mid-quarter or mid-year, ensure you are correctly adding prior data files from the clients’ prior payroll processor. Run a calculation to determine the FUTA rate that was being used by the prior payroll processor. Apply the first rule above and retroactively collect additional FUTA tax for prior quarters using the potential credit reduction rate.
- Follow up with your software and service providers. Given that many of the 2012 FUTA credit reductions states may also be up for credit reductions in 2013, tax compliance software developers should be prepared. It will not hurt to follow up in the 1st quarter and then a couple more times later in the year, just to ensure your system will be able to process the data correctly or export a correct and complete file to your tax filing service.
What steps did you take to prepare your staff and your client base for potential FUTA credit reductions this year?