Brittany Brooks Taxes can perplex anyone, but the complexity of payroll and taxes can be mind-boggling for small business owners, especially for employers that have a small human resources (HR) department or handle HR tasks themselves.
Common questions small business owners ask:
What’s FUTA?
Is State Unemployment Tax Act (SUTA) the same thing?
Am I filing the right form? How do I file forms?
Taking on this feat alone can be overwhelming, and it doesn’t have to be. Below is the information you need to understand what FUTA is and how to file, report, and pay your FUTA taxes.
What is the Federal Unemployment Tax Act (FUTA)?
FUTA is an acronym for the Federal Unemployment Tax Act. The Department of Labor (DOL) covers it, and the tax is used to assist states if they lack the funds to disperse Unemployment Insurance (UI) benefits to their residents. FUTA empowers states to provide unemployment compensation payments to employees laid off or fired. It’s not paid by the employee or withheld from employees’ paychecks.
It’s a payroll tax that is only paid by the employer. 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. That translates to a maximum tax of $420 per employee for the year.
So how do you file, report, and pay your FUTA taxes?
Reporting & Paying FUTA Taxes
When you file your FUTA tax, you’re required to use Form 940, the Employer’s Annual Federal Unemployment Tax Return. It’s due by January 31st, but if you made your FUTA tax deposits on time throughout the year, such as quarterly payments, you’ll have until February 10th to file.
The form must be filed by the next business day if the due date falls on a Saturday, Sunday, or legal holiday.
Other Important Due Dates To Add To Your Payroll Calendar
FUTA Tax Deposits
Even though the form is due once a year, tax deposits may be due at different times of the year depending on how much accumulates in the organization’s FUTA taxes. Tax liabilities of $500 or less for the quarter can be carried over to the next quarter. If your FUTA taxes still don’t accrue to $500, you can continue to carry it over until the end of the calendar year.
At that time, you can deposit that amount or pay it when you submit Form 940 by January 31st.
Tax liabilities of $500 or more for the quarter must be deposited by the last day of the first month following that quarter. For example: If $600 was accrued in FUTA during the first quarter (January-March), a tax deposit must be made before the end of April.
Under federal law, all federal tax deposits must be made through the Electronic Federal Tax Payment System (EFTPS). You can arrange for a tax professional, payroll service, or trusted third-party service to make a payment on your behalf. There’s also an option to have your financial institution set up a same-day wire transfer for you as well.
Credit Reduction States
How much you pay in FUTA taxes can be impacted by the state your business operates in. States may need assistance to cover unemployment benefits paid to their residents. That state may have to procure a Federal Unemployment Trust Loan from the DOL.
In the event that the state hasn’t repaid the loan, it is considered a credit reduction state. If the state doesn’t clear the balance by January 1st for two consecutive years and doesn’t resolve the full amount of the loan by November 10th of the second year, the FUTA credit rate will be reduced for employers in that state until the loan is paid in full.
This might sound enticing, but it has an adverse effect. Employers in credit reduction states will have to file a higher tax amount on their Form 940. Any increase will be incurred in the fourth quarter of the calendar year and due by January 31st.
Employers in credit reduction states are required to file a Schedule A alongside Form 940. Schedule A is also used for employers paying a FUTA tax in more than one state, whether it’s a credit reduction state or not.
Quick tip: It’s important to research the state unemployment insurance requirements in your state.
FUTA FAQs
How can I calculate the amount of FUTA tax I owe?
Since you only pay a 6% FUTA tax on the first $7,000 an employee grosses for the year, that’s a maximum of $420. If you only employ five people and they grossed $7,000, the amount owed in FUTA taxes would be $2,100 for the year.
If the employee made less than $7.000, multiply the amount they grossed by 6% (0.06) to determine the amount owed. (Must be done for each individual employee.) Example: If an employee grossed $3000, the FUTA tax amount would be $180 for that year.
Related: A Step-by-Step Guide to Calculating Payroll & Payroll Taxes for Small Business Owners
What happens if I don’t pay my FUTA taxes on time?
For late payments, interest is added to your missed deposit. The interest amount is determined by how late the payment is:
- 1-5 days late – 2% of your unpaid deposit
- 6-15 days late – 5% of your unpaid deposit
- More than 15 days – 10% of your unpaid deposit
- Failure to pay after 10 days of receiving the first notice – 15% of your unpaid deposit
How do I determine if my state is eligible for a FUTA tax credit?
The Department of Labor makes an annual announcement of credit reduction states after November 10th. You can find out if your state is on the list and its loan balance on the DOL’s FUTA Credit Reductions webpage.
FUTA, SUTA, FICA: What’s the difference?
The State Unemployment Tax Act (SUTA) utilizes its funds to provide unemployment compensation benefits like FUTA. FUTA and SUTA are only paid by the employer, not the employee.
FUTA and SUTA are separate taxes with FUTA being paid to the Internal Revenue Service (IRS), and SUTA being paid to the appropriate state.
*Most employers are subject to paying FUTA and SUTA payroll taxes.
FICA (Federal Insurance Contributions Act) doesn’t live in the realm of unemployment and operates with a purpose different from FUTA and SUTA. A portion of the employee’s wages is withheld and contributed to the employee’s Social Security and Medicare benefits. Once the contribution is calculated, the employer will match it and make a tax deposit of both contributions to the IRS for safekeeping.
How PrimePay Can Help
This can be a staggering amount of information to ingest and even harder to manage on your own. Don’t forget, we mentioned earlier that you don’t have to embark on the payroll tax journey alone.
We understand the complexities of employment taxes, unemployment claims, unemployment taxes, state and federal government regulations, and are here to help. We have tax professionals that are experienced in assisting small business owners with their federal, state, and local tax filings and PrimePay doesn’t stop there.
We offer technology that satisfies your HR and business needs from benefits and payroll to insurance and taxes. Don’t be unsure when you file and deposit your payroll taxes, go with confidence!
Don’t hesitate to reach out with any questions you may have or schedule a call to see what we can streamline for you.
Read our disclaimer here.
