FUTA Tax

In addition to quarterly State Unemployment Tax Act (SUTA) returns, employers are responsible for filing an annual Federal Unemployment Tax Act (FUTA) return and paying any tax due. The FUTA program was established by the federal government in 1939 as a response to the Great Depression. FUTA funds are used to support unemployed citizens by operating state workforce agencies (like OUI) and assisting states in paying unemployment benefits to qualified claimants.

Just as Kentucky operates an unemployment trust fund, the federal government has its own trust fund. Money in this fund, which comes from FUTA tax paid by employers like you, is used to pay up to half of extended state benefits in times of high unemployment. It also provides loans to state workforce agencies when the state’s trust fund has been depleted. In Kentucky, this happened in 2009, and the state took out a loan from the federal unemployment trust fund to cover benefit costs. A surcharge (see below) was enacted to pay interest on the loan beginning in 2012.

The FUTA tax is assessed at 6.0% of the first $7,000 paid to a covered employee. Employers who timely pay their SUTA, or state unemployment tax, receive a credit against their FUTA tax, up to 5.4%. In January of each year, the state performs FUTA certification for employers on the year prior to the year just filed, in other words, two years back from the current year. The state compares FUTA amounts paid by employers for the year under consideration to the amounts reported by the IRS to certify that employers are eligible for the state credit against FUTA tax.

If an employer hasn’t filed their annual return, the state records do not match IRS records, or the employer paid SUTA after February 10th of the year under consideration, then the employer will lose all or part of the 5.4% credit against FUTA. If an error is suspected, employers who lose certification may re-certify through self-service in KUIP. Otherwise, certification will be restored by the state upon timely payment of SUTA for the following year.

If Kentucky must obtain a federal loan due to future insolvency, a surcharge will be enacted to pay the interest on the loan. The amount of the surcharge is determined by congressional action and the amount of the loan, and will offset the employer credit against FUTA tax. Guidance will be provided by the Office of Unemployment Insurance if the surcharge is enacted in the future. Please see the table below for the maximum allowable FUTA credit in previous years.

Maximum Allowable Credit