FUTA Tax

In addition to state unemployment tax, the Federal Unemployment Tax Act (FUTA) imposes a payroll tax on employers also.  The FUTA tax is reported on IRS Form 940.  The federal tax is 6.2% of the first $7,000 paid to each employee.  However, employers are allowed an offset against the federal tax if they are paying taxes under an approved state unemployment compensation law in a timely manner.

Employers receive credit of up to 5.4% for the taxes they pay for state unemployment compensation.  The net tax (0.8%) collected by the federal government is used to finance state and federal administrative costs and extended benefit costs and to loan (advance) money to states that exhaust their funds available to pay benefits.

Federal Interest Assessment

Federal advances are subject to an interest charge by the U.S. Treasury.  In Missouri, statutes provide this interest charge is to be collected from employers that are covered by the Employment Security Law.  The amount of each employer’s share of the federal interest assessment is based on the employer’s taxable payroll during the previous calendar year.  The interest charge is assessed once per year during the second quarter.

Missouri received federal advances in the past when the state Unemployment Compensation Fund did not have enough money to pay unemployment benefits, and employers were assessed an interest charge each year from 2002 through 2007.  Missouri has now repaid all amounts loaned from the federal government; therefore, a federal interest charge will not be assessed in 2008.

Credit Reduction

When a state borrows money from the federal government to pay benefits and the balance of federal advances to a state is outstanding on January 1 for two consecutive years, the FUTA offset credit may be reduced, making the state a “credit reduction state”.

The credit reduction means employers cannot take the full offset credit and results in their having to pay FUTA taxes at a higher tax rate.  The amount equal to the reduced credits, including penalties and interest, would be applied to reduce the state’s balance of advances.

Missouri is not a credit reduction state.