Due to recent economic conditions, North Carolina, as well as many states, had to borrow money from the federal government in order to meet Unemployment Insurance benefits obligations.  The state has not been able to repay the loan and as a result, there will be a reduction in the credit North Carolina employers receive toward their Federal Unemployment Tax Act (FUTA) taxes for calendar year 2011. The increased revenue associated with this reduced credit will be used by the federal government to repay the loan.  North Carolina’s outstanding loan balance as of November 10, 2011 is $2,502,244,831.91.

Under the Federal Unemployment Tax Act (FUTA), employers typically pay an annual FUTA tax rate of only 0.6% because the 6.0% tax rate is offset by a federal credit of 5.4%. (The tax was 6.2% for a net tax of 0.8% previously, but the 0.2% surtax passed by Congress in 1976 finally expired June 30, 2011).  However, by law, after a state has had an outstanding loan balance for two consecutive years they will face a reduction in the 5.4% credit if the loan is not paid by November 10 in the same year.

What does this mean?

North Carolina employers (along with 19 other states and the Virgin Islands) will face a credit reduction of at least 0.3%.  Employers will be paying an additional $21.00 per employee retroactive back to January 1, 2011.  This amount will be added to the FUTA tax calculation on the year-end federal Form 940.  The tax will be included in the final tax deposit for 2011 due in January.

States losing full FUTA credit for 2011

Below is a list of states that will be subject to a FUTA credit reduction for 2011 including the amount of the reduction:

 -Source:  American Payroll Association