The IRS has issued a draft version of 2011 Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return. The draft version of the form takes into account the elimination of the 0.2% federal unemployment tax (FUTA) surtax, effective beginning with wages paid on July 1, 2011.

The surtax was part of the 6.2% gross unemployment tax rate that employers paid on the first $7,000 of wages paid annually to each employee (6% permanent tax rate, 0.2% temporary surtax). The FUTA tax rate, before consideration of state unemployment tax credits, is 6.0%, effective with wages paid beginning July 1, 2011. Most employers are allowed to claim 5.4% in state unemployment tax credits (known as the “normal credit”) against the FUTA tax rate if they timely pay their state unemployment taxes, making the net FUTA rate 0.6% beginning with wages paid on July 1 (0.8% on wages paid from January 1 to June 30, 2011).

The draft version of Form 940 has separate lines to compute the FUTA tax on wages paid before July 1, 2011 (lines 7b and 7c), and after June 30, 2011 (lines 7d and 7e). Employers should be separately tracking the FUTA wages paid before July 1, 2011, and after June 30, 2011. The IRS did not issue a draft version of 2011 Form 940, Schedule A, Multi-State Employer and Credit Reduction Information. Employers who paid wages in any state that is subject to a credit reduction must complete this schedule.

Under Title XII of the Social Security Act, states with financial difficulties can borrow funds from the federal government to pay unemployment benefits. If a state defaults on its repayment of the loan, the amount of state unemployment tax credits that employers in the state may claim on Form 940 is reduced. This effectually increases the employer’s FUTA tax rate by 0.3% annually, beginning with the second consecutive January 1 in which the loan isn’t repaid. As of Sept. 15, 2011, 27 states and the Virgin Islands have borrowed money from the federal government to help keep their unemployment insurance (UI) trust funds solvent. Many of these states have had outstanding loans with the federal government for two consecutive years. If these loans are not repaid by Nov. 10, 2011, employers in these states will not be eligible to claim 5.4% in state unemployment tax credits against the FUTA tax rate. The IRS will finalize 2011 Schedule A sometime after Nov. 10, 2011.

2011 Form 940 must be filed by Jan. 31, 2012. The draft version of Form 940 for tax year 2011 can be viewed at f940–dft.pdf.