Tax compliance is one of the most important responsibilities that new business owners undertake. Every time a business processes payroll, the proper payroll taxes must be withheld from each employee or paid by the employer. Federal Unemployment Tax, or FUTA, and State Unemployment Tax, or SUTA, make up one portion of these tax withholdings. But, what is the Federal Unemployment Tax?
What is Federal Unemployment Tax?
Federal Unemployment Tax Act (FUTA), is a payroll tax that each business must contribute to. This tax covers a portion of unemployment benefits at the federal level. The withholdings from FUTA are used to help assist states in providing unemployment benefits to those employees who have been terminated for most reasons.
Who is responsible for paying Federal Unemployment Tax?
All businesses who pass the Internal Revenue Service “general test” must pay this tax annually. According to the IRS, the “general test” conditions are as follows:
- You paid wages of $1,500 or more to employees in any calendar quarter, or
- You had one or more employees for at least some part of a day in any 20 or more different weeks. Count all full-time, part-time, and temporary employees.
The Federal Unemployment Tax is 100% employer paid. This tax is in addition to any SUTA taxes that are owed.
How is the FUTA amount calculated?
The current FUTA rate for all businesses is 6% on only the first $7,000 of wages paid to employees in a calendar year.
For Example:
FUTA rate = 6.0%
Wage base = $7,000
The first $7,000 in wages is taxed at 6%, which equals $420 in FUTA taxes for each employee.
However, since most businesses contribute to state unemployment insurance, most businesses may receive a credit for their SUTA contributions of 5.4% towards FUTA. Employers in all but a few states may take the 5.4% credit towards FUTA.
For Example:
FUTA rate after credit: 0.6%
Wage base = $7,000
The first $7,000 in wages is taxed at 0.6%, which equals $42 in FUTA taxes for each employee.
When and how is this tax paid?
In most cases, businesses report their tax liability and make tax payments each quarter. If the tax liability is more than $500 in any quarter, quarterly payments are required. If the liability is $500 or less, businesses can continue to carry it over to the next quarter until the cumulative tax is more than $500. Quarterly payments are due the last day of the month following quarter end.
Q1 – due April 30
Q2 – due July 31
Q3 – due October 31
Q4 – due January 31
Unlike SUTA, there is no electronic option for individual taxpayers for FUTA payments. The payments are filed on a Form 940 or electronically through a payroll provider.
Remember to check if your state allows a credit toward your tax responsibility and to setup your payroll tax deductions correctly for your employees to avoid incorrect FUTA payments. Furthermore, working with a trusted payroll vendor is a great way to ensure that your business is staying compliant.