Big government has done it again.
Legislators have raised taxes on entrepreneurs, and this time, they did it without any help from the incoming Taxmageddon that will kick in after the country is pushed over the fiscal cliff and falls to its collective economic death.
No, this time, the government is trying to make it so entrepreneurs in several states would pay more in taxes. The culprit? The federal penchant for rampant spending on unemployment benefits, which it forces upon states.
In all, small-business owners in 18 states will have to pay more in federal unemployment taxes when they file in January 2013 because their respective state governments are unable to pay back debt owed to the feds.
Income.com knows the stress that added federal taxes can put on an entrepreneur’s cash flow. That’s why it’s more important than ever to understand what FUTA is, what states are affected by credit reductions and how you can spare yourself added penalties by filing correctly.
How FUTA works
The federal unemployment tax (FUTA) is imposed on the the first $7,000 businesses pay employees. Currently, the FUTA rate is 6 percent, however, employers are granted a credit against the federal tax liability that can be up to a maximum of 5.4 percent of FUTA taxable wages. As such, many small-business owners only pay 0.6 percent, but many more will be paying increased taxes in January 2013.
Why some will pay more
The increased FUTA rates are the result of a state’s inability to pay back federal debt. The credit granted to employers that pay taxes into a state’s unemployment insurance (UI) program on time is reduced when their home state has an outstanding loan from the federal government that was used to pay out UI benefits.
The feds have ways of getting their money back from states. They punish entrepreneurs with a credit reduction on those states’ employers, which makes them pay increased FUTA rates. If a state has outstanding money owed to the federal government on January 1 for two consecutive years and the loan is not paid off by the end of the second year, a 0.3 percent reduction is imposed. For every consecutive year that the fiscal situation remains the same, another 0.3 percent will be taken away from the credit extended to employers. The federal government can also levy extra credit reductions on states.
Which states are affected
Eighteen states have been hit with credit reductions in 2012, some for the first time, others for a second or third time. Small-business owners in Arizona, Delaware and Vermont will pay a total FUTA rate of 0.9 percent when they file in 2013. Those in Arkansas, California, Connecticut, Florida, Georgia, Kentucky, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Rhode Island and Wisconsin will have a total tax rate of 1.2 percent. Employers in Indiana will be hit even harder with a rate of 1.2 percent. Additionally, those in the U.S. Virgin Islands will pay 1.5 percent.
How to ensure you pay properly
Nobody wants to get in between the greedy federal fat cats and their money, so employers in the affected states need to ensure they pay the exact amount of FUTA taxes – dictated by whether the state was deemed to have a credit reduction or not.
The two biggest resources you will need to pull from are the U.S. Internal Revenue Services’ Publication 15, specifically Circular E, and the agency’s Form 940, which lays out the details and math associated with FUTA in full.
Employers, you will have to compute both the FUTA and SUTA (state unemployment tax) liabilities and subtract SUTA from FUTA so you know what money you owe to the IRS.
Income.com knows how tough it can be for entrepreneurs with a minimal workforce to shell out extra money because of matters far beyond their reach. However, it also knows failure to do so will result in stiff penalties and repercussions from the feds. Small-business owners can save money by ensuring they won’t have to pay more in the future.