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).
Reporting and Paying FUTA Taxes
When you file your FUTA tax, you must 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.
If the due date falls on a Saturday, Sunday, or federal holiday, you must file Form 940 by the next business day.
What Happens If I Don’t Pay My FUTA Taxes on Time?
For late payments, interest is added to your missed deposit. The delay of your payment determines the owed interest amount:
- 1-5 days late: 2% of your unpaid deposit
- 6-15 days late: 5% of your unpaid deposit
- 15+ days: 10% of your unpaid deposit
- Failure to pay after 10 days of receiving the first notice: 15% of your unpaid deposit
Scheduling FUTA Tax Deposits
Even though Form 940 is due once a year, you may schedule tax deposits at different times depending on how much money accumulates in your 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 pay 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
The state in which your business operates determines how much you pay in FUTA taxes. 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.
If the state hasn’t repaid the loan, it’s considered a credit reduction state. Suppose the state doesn’t clear the balance by January 1st for two consecutive years and doesn’t resolve the total amount of the loan by November 10th of the second year. In that case, the FUTA credit rate will be reduced for employers in that state until the loan is paid in full.
This situation might sound enticing, but don’t throw a party yet. Employers in credit reduction states must file a higher tax 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 must also file a Schedule A alongside Form 940. Schedule A is used for employers paying a FUTA tax in more than one state, whether it’s a credit reduction state or not.
How Do I Determine If My State is Eligible for a FUTA Tax Credit?
The Department of Labor (DOL) 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?
Feel overwhelmed with the many payroll and tax acronyms? We hate to break it to you – there’s more. You may hear FUTA, SUTA, and FICA all within the same conversation, and you must keep them straight.
Below is a quick breakdown of FUTA vs. SUTA vs FICA.
FUTA vs. SUTA
FUTA and the State Unemployment Tax Act (SUTA) function collaboratively to sustain unemployment insurance programs. These programs provide essential financial assistance to employees terminated for reasons beyond their control.
Like FUTA, SUTA is only paid by the employer, not the employee. But while FUTA is paid to the Internal Revenue Service (IRS), SUTA pays the appropriate state.
Ultimately, FUTA and SUTA collectively support a safety net for employees facing unemployment. While FUTA ensures a federal framework for financial contributions, SUTA focuses on gathering resources at the state level. Together, they form the backbone of unemployment insurance programs, offering a lifeline to individuals navigating the challenges of involuntary job loss. Understanding these contributions helps ensure a comprehensive approach to supporting workers during economic uncertainty.
FICA TAX
Alternatively, the Federal Insurance Contributions Act (FICA) doesn’t live in the realm of unemployment and operates with a different purpose from FUTA and SUTA.
A portion of employees’ wages are withheld and contributed to their 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
We get it – ingesting this staggering amount of information is challenging. It’s even harder to manage your payroll and taxes independently.
Luckily, PrimePay is fluent in the complexities of employment taxes, unemployment claims, unemployment taxes, state and federal government regulations.
If you’re a small business, we have experienced tax professionals passionate about assisting business owners with their federal, state, and local tax filings. And if you’re a mid-sized or enterprise business, we offer specialized services and scalable technology that satisfies your HR and business needs.
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