FUTA is an acronym for the United States Federal Unemployment Tax Act, which requires employers to pay unemployment tax.
FUTA payments fund unemployment programs in the U.S. that provide unemployment benefits for terminated workers.
The Internal Revenue Service (IRS) collects FUTA taxes. Employers paying wages of $1,500 or more to their employees must file a FUTA form annually and pay the tax in quarterly deposits.
FUTA vs. SUTA
As part of their labor burden, employers also pay unemployment insurance taxes at the state level through the State Unemployment Tax Act (SUTA) to fund unemployment compensation.
SUTA is also called state unemployment insurance (SUI). Some states require additional unemployment tax withholding from an employee’s wages on top of the employer’s SUTA tax contributions.
SUTA and FUTA are both employer taxes set up to fund unemployment insurance programs; however, individual states manage and collect SUTA, while the IRS manages and collects FUTA on the federal level.
FUTA vs. FICA
The Federal Insurance Contributions Act (FICA) is a U.S. federal payroll tax that employers and employees pay to provide Social Security and Medicare benefits for retirees and individuals with disabilities. FICA is a separate tax from FUTA.
Employers and employees typically contribute the same amount to FICA tax from the employee’s gross pay, with exceptions for Medicare if the employee’s gross pay is above a certain threshold.
FUTA vs. UI
Unemployment insurance (UI) is a federal program managed through FUTA that provides financial assistance to terminated employees. UI funding comes from the quarterly FUTA taxes collected from employers.
Who pays FUTA tax?
Typically, most U.S. employers must pay FUTA taxes for their U.S. employees. Employees do not pay the FUTA tax. Three different tests determine whether employers must pay the FUTA tax: the general test, household employers test, and agricultural employers test.
Most employers that hire U.S. employees use the general test and pay FUTA tax. Employers must pay FUTA taxes if they pay wages of $1,500 or more to employees during any calendar quarter, or if they have at least one employee on payroll for at least part of the day for 20 weeks or more within a calendar year period.
For the household employers test, an employer is subject to FUTA tax if they pay $1,000 or more to a household employee in a calendar quarter. A household employee is an individual who works in a private home, fraternity, or sorority doing household work.
Finally, the agricultural employers test requires a business to pay FUTA if it pays an employee cash wages of $150 or more in a year for agricultural labor or if the total wages it pays to all farmworkers is $2,500 or more.
It is illegal for employers to withhold the FUTA tax from an employee’s wages.
Who is exempt from FUTA tax?
An employer is exempt from FUTA if they pay employees less than $1,500 in wages during a calendar quarter, or if they haven’t had an employee on payroll for 20 weeks or more within a calendar year.
Nonprofits that qualify as 501(c)(3) organizations are exempt from paying FUTA. An organization must apply for 501(c)(3) status and be granted the status legally through the IRS to meet FUTA exemptions. These qualifying nonprofits are typically public charities that give funds directly to a cause.
Are self-employed workers exempt from FUTA tax?
Self-employed workers are also exempt from FUTA taxes. If an employer engages contractors in their business, they do not pay FUTA taxes on payments to them.
What is the FUTA tax rate?
The FUTA tax rate is 6% and applies to the first $7,000 an employer pays to each employee as wages annually. The $7,000 amount is the FUTA wage base.
What is the FUTA tax credit?
If an employer also pays wages subject to SUTA, they may receive up to a 5.4% credit on FUTA taxes when filing a Form 940, the Employer's Annual Federal Unemployment Tax Return. If an employer pays their SUTA taxes in full, they are entitled to the maximum credit of 5.4%, bringing the FUTA tax rate down to 0.6%.
How to calculate FUTA payroll tax
To calculate the FUTA payroll tax, add the total wages paid to all employees for the previous quarter. If this number is equal to or greater than $1,500, the employer must pay FUTA taxes.
Multiply each employee’s wage base, capping each at $7,000 annually, by the number of employees. Then, multiply the 6% tax rate by the total wage base of all employees. The total equals the quarterly FUTA tax owed to the federal government.
For example, a company has 50 employees who all make at least $7,000 in one year. Calculate as follows:
Wage base of all employees: $7,000 x 50 = $350,000
FUTA tax: $350,000 x .06 = $21,000
This FUTA tax liability amount does not include any SUTA tax obligations. The most an employer must pay in FUTA tax annually is $420 per employee ($7,000 x 0.06).
How to report FUTA payroll tax
Employers report the FUTA payroll tax on Form 940, the Employer's Annual Federal Unemployment Tax Return. Employers must file Form 940 by January 31 of the year following the year to which it relates.
Although Form 940 is filed annually, employers may have to deposit FUTA tax before filing the return. For instance, if an employer’s FUTA tax liability is more than $500 for the calendar year, they must deposit at least one quarterly payment.
If an employer’s FUTA tax liability is $500 or less in a quarter, the employer carries it over to the next quarter until the cumulative FUTA tax liability is more than $500. FUTA taxes are due on the last day of the month at the end of each quarter.
Employers must know how to correctly calculate, pay, and report FUTA tax for U.S. employees to understand total employee cost when hiring U.S. talent and to maintain payroll compliance with federal regulations to avoid severe penalties.
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