Federal Unemployment Tax Act FUTA: Definition and Calculation of FUTA Liability
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Summary:
Federal Unemployment Tax Act (FUTA) is an important part of payroll taxes that employers must comply with. FUTA is a federal tax that provides funds for the administration of state unemployment insurance programs and pays unemployment compensation to eligible workers who have lost their jobs. Employers are responsible for calculating, reporting, and paying FUTA taxes to the IRS. This article explains what FUTA is, who needs to pay it, how to calculate FUTA tax liability, and how to pay and report FUTA.
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What is FUTA?
The Federal Unemployment Tax Act (FUTA) is a federal tax that employers must pay to fund unemployment compensation for eligible workers who have lost their jobs. FUTA provides funds for the administration of state unemployment insurance programs, and its purpose is to provide temporary financial assistance to workers who are unemployed through no fault of their own.
Who needs to pay FUTA?
Employers who pay wages to employees totaling $1,500 or more in any calendar quarter during the current or preceding calendar year are required to pay FUTA taxes. This includes employers who have one or more employees, regardless of whether the employees are full-time or part-time. Employers are exempt from FUTA if they are a household employer or if they are a tax-exempt organization.
How to calculate FUTA tax liability
The FUTA tax rate is 6% of the first $7,000 of each employee’s wages paid during the calendar year. This means that the maximum FUTA tax per employee per year is $420. However, employers can take a credit of up to 5.4% for state unemployment taxes paid, resulting in a net FUTA tax rate of 0.6%.
To calculate FUTA tax liability, multiply each employee’s taxable wages by the FUTA tax rate of 6%, then subtract the credit for state unemployment taxes paid. The taxable wage base for FUTA is $7,000 per employee per year. For example, if an employee earns $10,000 per year, the taxable wages subject to FUTA tax would be $7,000, and the FUTA tax liability would be $420 (6% of $7,000).
If an employer operates in a credit reduction state, the FUTA tax rate may be increased. This occurs when a state has not repaid money it has borrowed from the federal government to pay unemployment benefits.
How to pay and report FUTA
Employers must report FUTA taxes quarterly using Form 941, Employer’s Quarterly Federal Tax Return. The due date for filing Form 941 is the last day of the month that follows the end of the calendar quarter. Employers who owe $500 or less in FUTA tax for the quarter can pay the tax with their quarterly Form 941. Employers who owe more than $500 in FUTA tax for the quarter must deposit the tax using the Electronic Federal Tax Payment System (EFTPS).
FUTA vs. FICA
FUTA and Federal Insurance Contributions Act (FICA) are two different types of payroll taxes. FICA taxes are Social Security and Medicare taxes that employers and employees pay to fund these programs. FUTA taxes, on the other hand, are paid solely by employers to fund state unemployment insurance programs. Employers are required to pay both FUTA and FICA taxes for their employees.
Frequently asked questions
Are there any exemptions from FUTA tax?
Yes, household employers and tax-exempt organizations are exempt
When are FUTA taxes due?
Employers must report FUTA taxes quarterly using Form 941, and the due date for filing Form 941 is the last day of the month that follows the end of the calendar quarter.
What is the FUTA tax rate?
The FUTA tax rate is 6% of the first $7,000 of each employee’s wages paid during the calendar year, but employers can take a credit of up to 5.4% for state unemployment taxes paid.
Key takeaways
- FUTA is a federal tax that employers must pay to fund unemployment compensation for eligible workers who have lost their jobs.
- Employers who pay wages to employees totaling $1,500 or more in any calendar quarter during the current or preceding calendar year are required to pay FUTA taxes.
- The FUTA tax rate is 6% of the first $7,000 of each employee’s wages paid during the calendar year, but employers can take a credit of up to 5.4% for state unemployment taxes paid.
- Employers must report FUTA taxes quarterly using Form 941, and the due date for filing Form 941 is the last day of the month that follows the end of the calendar quarter.
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