The Federal Unemployment Tax Act (FUTA) is an essential piece of legislation that demands employers pay an additional tax on top of existing federal income and payroll taxes. This revenue is channeled to state unemployment insurance agencies to fund unemployment benefits for individuals who have lost their jobs.
FUTA taxes are exclusively the responsibility of employers, thus not affecting individual taxpayers directly. The standard FUTA tax rate is 6%, which only applies to the first $7,000 paid to each employee in a calendar year.
Key Takeaways
- FUTA is a payroll tax levied on businesses with employees to fund unemployment benefits.
- The tax rate is 6% on the first $7,000 paid annually to each employee.
- These taxes are borne solely by employers and not deducted from employees’ wages.
- Employers may avail a tax credit of up to 5.4% on their FUTA tax if they pay their state unemployment insurance.
Exploring the Federal Unemployment Tax Act (FUTA)
FUTA is designed to generate funds to support state-level unemployment insurance and job service programs. Employers are mandated under the Act to pay these taxes, representing a fraction of federal payroll taxes. According to the IRS, the tax rate stands at 6%, applied only to the initial $7,000 paid per employee annually, termed as the FUTA wage base.
These funds are used specifically for unemployment compensation to assist workers who have lost their jobs. FUTA is implemented exclusively on employers, distinguished from other payroll taxes like the Social Security tax, which share a burden between employers and employees.
How to Calculate FUTA Tax Liability
Calculating FUTA tax liability is straightforward. The tax applies to the first $7,000 in eligible wages paid to each employee annually at a rate of 6%. Employers often receive a credit of up to 5.4% against this tax. Here’s an example to illustrate:
Suppose Employee A is paid $10,000 and Employee B is paid $5,000 in wages subject to FUTA taxes within a quarter.
FUTA Liability = (Employee A's Eligible Wages + Employee B's Eligible Wages) x 6%
FUTA Liability = ($7,000 + $5,000) x 6% = $720
With an eligible tax credit of $648 ($12,000 x 5.4%), the net liability would be $72.
Employers file IRS Form 940 annually to report their FUTA taxes, typically to be submitted during the first quarter of the year.
Who Pays the FUTA Tax?
The responsibility and process of paying FUTA taxes vary among different entities:
Businesses
A business must remit FUTA taxes if it:
- Paid at least $1,500 in wages during any calendar quarter in the current or previous year.
- Employed at least one worker for part of a day in any 20 or more weeks in the current or preceding year.
Household Employers
Having a household employee may also trigger FUTA obligations if:
- Cash wages of $1,000 or more were paid in any calendar quarter.
- The employee works in the employer’s private home, local college club, or chapter of a college fraternity.
Household employers can utilize Schedule H of Form 1040 for reporting.
Agricultural Employers
Agricultural employers must comply if:
- They paid $20,000 or more in cash wages to farmworkers in any quarter.
- They employed 10 or more farmworkers for part of a day in 20 different weeks within a year.
Special Exemptions
Indian tribal governments, religious, educational, scientific, charitable, or other tax-exempt organizations are generally exempt from FUTA, provided specific conditions are met.
Reporting and Paying FUTA Taxes
FUTA taxes are deposited quarterly if totaling $500 or more in a year. Smaller amounts can be carried forward. Payments are usually due the month after the close of each quarter. For instance, Q1 FUTA is due by April 30.
Employers must file Form 940 annually, with deadlines and specific addresses contingent on their state.
FUTA vs. SUTA: Understanding the Distinctions
State Unemployment Tax Act (SUTA) imposes additional unemployment taxes at the state level, varying from 0% to 18.78%. Timely SUTA payments can qualify employers for up to a 5.4% reduction in their FUTA obligations.
FUTA vs. FICA: Segregating the Taxes
While FUTA funds unemployment benefits through solely employer contributions, Federal Insurance Contribution Act (FICA) taxes finance Social Security and Medicare, split between employer and employee.
Special Considerations
Wages to a spouse, child below 21, or parents don’t count as FUTA wages. Exclusions extend to fringe benefits, life insurance, and retirement contributions.
The Bottom Line
The Federal Unemployment Tax Act is levied solely on employers. Revenues collected help fund vital unemployment programs across the nation, ensuring support for those who find themselves without work.
Related Terms: State Unemployment Tax Act, Federal Insurance Contribution Act, unemployment insurance, payroll tax.
References
- Internal Revenue Service. “Topic No. 759 Form 940– Employer’s Annual Federal Unemployment (FUTA) Tax Return – Filing and Deposit Requirements”.
- Internal Revenue Service. “Instructions for Form 940”.
- Internal Revenue Service. “Publication 51, (Circular A), Agricultural Employer’s Tax Guide”.
- Internal Revenue Service. “Employment e-File”.
- Ballotpedia. “State Unemployment Tax”.
