FUTA, or Federal Unemployment Tax Act, is an act that the US government passed to fund unemployment programs. It is based on the idea that employers who have employees will contribute to a fund to help pay for unemployment insurance. The good thing about FUTA is that it’s only used in states that do not supply their state unemployment programs.
In this article, we will be discussing what FUTA is, how it is calculated, who’s subject to FUTA, and who’s exempt from paying FUTA. So if you are interested in learning more about FUTA or an employer who is liable to FUTA tax, this article is for you.
What is FUTA – Federal Unemployment Tax Act, and what is it based on?
The Federal Unemployment Tax Act is an idea of the US government to help fund Unemployment Insurance programs for states that don’t have their state unemployment funds. It was passed back in 1939 and offered great help for States that couldn’t afford to pay money out of their own pockets.
The revenue that FUTA generates is distributed equally among all the states. This means every state gets a percentage of the revenue equally depending on how big their population is, compared to other states. Then is allocated to state unemployment insurance agencies. These agencies use these funds for people who are currently unemployed and do not have any income.
These funds are collected from employers through payroll taxes. These employers only have employees and withhold state income tax from them, meaning that employers or companies that don’t have any employees do not pay FUTA taxes.
Federal unemployment tax act rates and how to calculate them?
As of 2022, the minimum FUTA tax rate is 6%. This means that an employer has to pay 6% of their state’s standard unemployment insurance rate for every employee. The calculation for this is very straightforward.
To calculate this Tax, we will need Taxable Wage Base Limit, which is $7,000, and FUTA Tax rate, which is 6%.
To find out the Tax per employee, you have to multiply the taxable wage base limit by the FUTA tax rate, which is 6%.
FUTA Tax per employee = $7,000 x 6% = $420
Let’s say a company has 10 employees. What will their FUTA taxes be?
FUTA Tax for company = $7,000 x 6% = $420 x 10 = $4,200
So the company has to pay $4,200 in FUTA tax.
Who Pays FUTA Tax?
According to the federal unemployment tax act, any employer that has paid $1,500 or more in wages during a quarter is required to pay FUTA tax on the first $7,000 of employee compensation annually, is liable to pay this tax. Anything beyond that is non-taxable. Employers who have hired one or more people for at least a portion of a day, for 20 or more weeks during the year, must pay this tax as stipulated in Federal Unemployment Tax Act.
So let’s say an employer has hired one person for seven months out of the year. Are they still liable to pay FUTA tax?
Yes. They will be required to contribute 6% of the first $7,000 every employee earns towards their state unemployment insurance funds in a calendar year.
Who is exempt from paying FUTA?
Companies that pay less than $1,500 per employee each quarter are not required to pay FUTA.
In simple words, companies that don’t have any employees are exempt from paying FUTA. This makes sense because companies with no employees do not make enough money to pay taxes towards FUTA.
How to reduce your Federal Unemployment Tax?
There are a few ways businesses can reduce their federal unemployment tax burden. First, you should know that if your business has fewer than ten employees and it did not employ anyone for more than four months during the current or previous calendar year, you will not owe this tax at all. This is why it is possible to have a “zero liability.”
Paying SUTA (State Unemployment Tax Act) can be another way to reduce your FUTA tax. Suppose you have employees who work in California, Arizona, and New York. In that case, we recommend checking the calculation of State Unemployment Tax thresholds before making any federal unemployment tax decisions. When you pay SUTA, you can receive partial credit for your FUTA.
How to file your Federal Unemployment Tax ?
Paying this tax is a mandatory task that every business that meets specific requirements must complete. Every year before January 31, you must file Form 940 to report your Federal unemployment tax liability on wages paid. However, if you deposited all FUTA tax when it was due, you have until February 10 to file. You can submit your return on the following business day if it is due on a Saturday, Sunday, or legal holiday.
Key takeaways:
1. Contributions to the Federal Unemployment Tax Act provide unemployment benefits for out-of-work laborers.
2. This tax is assessed on up to $7,000 in employee wages per individual and must be paid by businesses that have employees.
3. Businesses can reduce this tax burden by having fewer than ten employees or by implementing a pay-in plan.
4. Businesses that meet requirements must file Form 940 before January 31 and can submit it on the next business day if it is due on a Saturday, Sunday, or legal holiday.
Bottom Line
The Federal Unemployment Tax Act is how the US contributes to Unemployment Insurance funds through payroll taxes. Every employer with employees has to contribute 6% of the first $7,000 every employee earns in a calendar year. The money goes towards Unemployment Insurance funds and is distributed equally among all the states. Any employer who pays less than $1,500 per employee each quarter is exempt from FUTA contributions.
