Year end 2011 was more challenging than recent years for many of our Clients and payroll software partners, due to the 21 FUTA Credit Reduction States. For 2012, there are 25 states currently up for possible FUTA credit reductions. Coming fresh off of preparing and filing the payroll tax returns and payroll tax deposits for 4th quarter 2011 seems to me the best time to start preparing for year end 2012. At Payroll Tax Management, we are taking lessons learned from year end 2011 to proactively prepare our clients for year end 2012, when many of the same states are likely to face FUTA credit reductions again.
1. Collect FUTA from clients at expected credit reduction rate. Beginning with 1st quarter, 2012, 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 2012. When processing Federal payroll taxes for 4th quarter 2012, 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 2012.
2. 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.
3. Follow up with your software and service providers. Given that many of the 2011 FUTA credit reductions states may also be up for credit reductions in 2012, tax compliance software developers should be more prepared this year. It will not hurt to follow up now 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 are you taking to prepare your staff and your client base for potential FUTA credit reductions in 2012?