New York Employers Penalized for State's Unpaid Loan from the Federal Government in Form of Retroactive Tax Increase for 2011, Generally $21 per Employee

As of 12/9/2011, all New York employers will be required to pay an additional 0.3% FUTA (Federal Unemployment Tax Act) tax on the first $7,000 paid to each employee during 2011. This generally results in a $21 increase in FUTA tax for each employee that worked for the employer during 2011. This retroactive tax increase was triggered when the state of New York had an outstanding loan balance (in order to pay unemployment benefits) for two consecutive years, and the full amount of the loan was not repaid by November 10 of the second year. New York has authorized a bond issuance in order to pay back the federal government to avoid this increased rate for 2012 and beyond but the bond issuance has no impact on the rate increase for 2011.

When the last scheduled payroll of 2011 is run, the additional liability amount will automatically be calculated, impounded (if applicable) and scheduled for payment.

Under the provisions of the American Federal Unemployment Tax Act (FUTA), a federal tax is levied on employers covered by the Unemployment Insurance program. The law provides a credit against federal tax liability of up to 5.4% to employers who pay state taxes timely under an approved state UI program. The credit against the federal tax may be reduced if the state has an outstanding advance (commonly called a "loan"). When states lack the funds to pay UI benefits, they may obtain loans from the federal government. To assure that these loans are repaid, and in accordance with Title XII of the Social Security Act, the federal government is entitled to recover those monies by reducing the FUTA credit it gives to employers, which is the equivalent of an overall increase in the FUTA tax. When a state has an outstanding loan balance on January 1 for two consecutive years, and the full amount of the loan is not repaid by November 10 of the second year, the FUTA credit will be reduced until the loan is repaid. This process is commonly called FUTA Credit Reduction and was designed as an involuntary repayment mechanism. The reduction schedule is 0.3% for the first year and an additional 0.3% for each succeeding year until the loan is repaid. From the third year onward, there may be additional reduction(s) in the FUTA tax credit (commonly dubbed "add-ons").

For 2011, there are 21 states (including the Virgin Islands) that are subject to the FUTA Credit Reduction:

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