Understanding taxes isn’t for the faint of heart. From acronyms to calculations to deadlines, it’s hard to keep it all straight.
Whether you’re an established company with a payroll provider or a small business owner navigating payroll for the first time, it’s critical to understand unemployment tax so your company remains compliant.
Below is the information you need to understand FUTA, including how to calculate, file, and schedule your FUTA taxes.
What is the Federal Unemployment Tax Act (FUTA)?
The Federal Unemployment Tax Act (FUTA) was enacted to establish a system that aids states in financing unemployment benefits for people who have been terminated, excluding cases of gross misconduct. If you pay wages of $1,500 or more to your employees, you must contribute to this tax annually.
It’s crucial to understand that this tax is distinct from any state-level unemployment insurance you may be responsible for (more on state-level insurance later).
Calculating Your FUTA Tax
The standard FUTA tax rate is 6.0% on the first $7,000 of taxable wages per employee. The FUTA rate isn’t applicable once the employee grosses more than $7,000 for the calendar year, which translates to a maximum annual tax of $420 per employee.
For example, if you employ five people who gross over $7,000 annually, the amount owed in FUTA taxes would be $2,100 for the year ($7,000 x 0.06 x 5 = $2,100).
If one employee grosses less than $7,000 a year, you multiply that salary by 6%. For example, if an employee annually grosses $3,000, the FUTA tax amount is $180 for the year ($3,000 x 0.06).