What exactly is the Federal Unemployment Tax Act (FUTA)?
Most employers pay payroll taxes under the Federal Unemployment Tax Act (FUTA). FUTA funds state unemployment insurance agencies, which provide unemployment payments to unemployed people. Employers, not individuals, pay FUTA taxes. The 6% FUTA tax rate applies only to a particular amount paid to employees every year.
Formula for FUTA Tax Liability
Calculating a company’s FUTA tax burden is easy. FUTA taxes apply to the first $7,000 in employee payments, excluding exempt charges. Employers can claim a 5.4% credit against the 6% FUTA tax.
Suppose Employee A received $10,000 in first-quarter pay, subject to FUTA taxes, while Employee B received $5,000. Taxes apply exclusively to Employee A’s first $7,000 every quarter. Therefore, tax liability:
FUTA Liability = (A + B’s Eligible Wages) x 6%
($7,000 + $5,000) x $6% = FUTA Liability
FUTA taxes would cost the corporation $720. The corporation may be eligible for a $648 tax credit ($12,000 x 5.4%), reducing its tax liability to $72.
Federal Unemployment Tax Act comprehension
Federal statute FUTA funds unemployment insurance and job service programs in every state. The Act requires employers to pay annual or quarterly federal unemployment taxes, part of payroll taxes.
Taxes are 6%. The IRS states that the “tax applies to the first $7,000 you pay each employee in compensation for the year. The federal, or FUTA, pay base is $7,000. State laws may affect your salary basis.”
Unemployed workers receive unemployment compensation from the account. Although the FUTA payroll tax is based on employees’ earnings, only employers pay it. Thus, it is not taken from salaries. FUTA varies from payroll taxes like Social Security, which affect employers and workers.
Particular Points to Consider
FUTA earnings do not include spouse, child under 21, or parent wages. Federal unemployment taxes do not cover fringe benefits, group term life insurance, or employer retirement account payments.
Form 940 can be updated for past years. The IRS recommends updating prior-year data in the following year. The 2023 filing amends the 2022 Form 940.
Various authorized people can sign Form 940 and report FUTA taxes. A business owner, president, vice president, primary officer, fiduciary in charge of an estate, authorized partner, or corporate officer can sign the document.
Who is responsible for the FUTA tax?
FUTA reporting requirements differ depending on the entity remitting taxes to the IRS. FUTA taxes are paid annually or quarterly, depending on an employer’s responsibility. Here are the reporting obligations for various employers and businesses.
Businesses
A firm owes FUTA if it fulfills one of two IRS conditions. To collect and remit FUTA, a firm must meet one of two general measurements:
- It paid at least $1,500 in compensation in any quarter this year or last.
- It employed at least one full-time, part-time, or temporary worker for at least part of a day in 20 or more weeks in the current or preceding year.
Employers in the Household
Household employers who hire nannies, babysitters, maids, housekeepers, and others to work in their homes must report differently. Employers of households must pay FUTA tax on salaries if two requirements are met:
- Household employees received $1,000 or more in cash pay in any quarter.
- The domestic worker works in a private home, collegiate club, or fraternity chapter.
Household employers can submit FUTA taxes using Schedule H on Form 1040 instead of Form 940.
Employers in agriculture
Employers in agriculture have different criteria. If an employer fulfills one of these requirements, FUTA tax collection and reporting apply:
- In any quarter, farmworkers received $20,000 or more in cash earnings.
- For any 20 or more weeks in a year, ten or more farmworkers worked some part of the day.
Other Employers
Tribal governments in India are FUTA-exempt. The tribe must have engaged in the state unemployment system all year and followed unemployment rules. FUTA does not apply to religious, educational, scientific, charitable, or tax-exempt organizations. State and local government services are excluded.
State Unemployment Tax Act (SUTA) vs. Federal Unemployment Tax Act (FUTA)
Many states charge employers an extra unemployment tax under the State Unemployment Tax Act. Employee salaries are taxed 2%–5% by SUTA.
SUTA taxes can reduce FUTA taxes. If they pay state unemployment taxes on time and in whole, employers can claim a 5.4% tax credit on taxable revenue. This amount reduces employee federal unemployment taxes.
The net tax rate for an employer with the maximum credit is 0.6% (6% minus 5.4%). Thus, FUTA tax minimums are $42 per employee. FUTA credit is not available to state unemployment tax-exempt firms.
Federal Unemployment Tax Act vs. FICA
While FUTA funds unemployment benefits, FICA taxes are different in numerous respects. Employers and employees pay FICA taxes. The two share the tax equally, but self-employed people pay both.
FICA funds government initiatives. These taxes fund Social Security and Medicare. Both workers and businesses are required to withhold it automatically from employee paychecks under federal law.
What exactly is FUTA?
Federal Unemployment Tax Act Employers pay a payroll tax to finance US unemployment programs. A corporation must pay 6% on employee earnings up to $7,000. Companies can typically obtain 5.4% credits.
What is the difference between FUTA and SUTA?
Both FUTA and SUTA are payroll taxes that finance government unemployment programs. Although SUTA is examined at the state level, FUTA is assessed federally.
What is the difference between FUTA and FICA?
FUTA is an employer-specific payroll tax that funds federal unemployment programs. Employer and employee FICA payroll taxes support Medicare and Social Security.
Who Must Follow FUTA?
Most firms with workers must comply with FUTA. FUTA applies to companies that pay employees more than $1,500 in any quarter. FUTA applies to companies with one or more employees who worked part of a day in 20 or more weeks.
Do Employers Pay FUTA?
Employers pay for FUTA. Unlike other payroll taxes, FUTA is not withdrawn from an employee’s paycheck, and the employer is responsible for it.
The Bottom Line
Few people know about FUTA taxes. The Federal Unemployment Tax Act exclusively taxes businesses, not workers. You don’t pay this extra tax as an employee. Federal and state taxes fund unemployment insurance systems.
Conclusion
- Businesses with employees pay a payroll tax under the Federal Unemployment Tax Act to finance unemployment benefits.
- FUTA taxes the first $7,000 per employee at a rate of 6%.
- Despite being based on employee earnings, FUTA taxes only employers.
- FUTA and SUTA are comparable taxes on various levels of government, but FICA funds distinct programs by charging different people.
- Employers with state unemployment insurance can obtain a 5.4% federal tax credit, lowering their FUTA tax rate to 0.6%.
