When you think of unemployment insurance tax, you probably think of state unemployment tax first—but there’s actually a federal unemployment tax too.
Both state and federal unemployment tax are taxes that employers pay directly to the government, typically calculated as a percentage of payroll. Employment tax obligations can include federal, state, and local income tax, social security and Medicare tax, and SUTA and FUTA tax. To maintain compliance (and be prepared to pay), employers need to understand which taxes apply to them, how to calculate their liabilities, and when and how to make payments.
Here’s what business owners need to know to comply with FUTA tax responsibilities.
What is the Federal Unemployment Tax Act (FUTA)?
The Federal Unemployment Tax Act (FUTA) is a federal law that imposes an employment tax (often referred to as the “FUTA tax” or “FUTA”) on covered employers.
The federal government uses FUTA tax revenue to support federal oversight of state programs. It also provides a federal fund that states can borrow from during periods of high unemployment and distributes FUTA funds to state workforce agencies, which use them to provide temporary unemployment insurance to eligible workers.
Who has to pay FUTA?
Employers, not employees, pay 100% of FUTA tax. Under federal law, businesses must pay FUTA taxes if they meet either of the following conditions:
- Payroll threshold. A business has paid more than $1,500 in wages during any quarter in the current or previous calendar year.
- Employment threshold. A business had at least one full-time, part-time, or temporary employee for at least part of a day in 20 or more different weeks (either consecutive or non-consecutive) during the current or previous calendar year.
The federal government applies different thresholds to household and agricultural employers.
- Household employers. “Household employers” are individuals or entities that employ household workers, including nannies, housekeepers, or other domestic workers who perform household work in a private home, local college club, or local chapter of a college fraternity or sorority. Household employers are required to pay FUTA taxes if they’ve paid more than $1000 in wages to a household employee during any quarter in the current or previous calendar year.
- Agricultural employers. Agricultural employers are subject to FUTA contribution requirements if they meet either of the following two conditions: 1)They paid wages of $20,000 or more to farmworkers during the current or previous calendar year, or 2) The employer employed 10 or more farmworkers during some part of the day during any 20 or more different weeks in the current or previous calendar year.
All of these thresholds are relatively low—meaning that most businesses with employees are required to pay FUTA taxes.
Some organizations are exempt from FUTA requirements. Here’s an overview:
- Tribal governments. Indian tribal governments are exempt from FUTA requirements if they’ve participated in their state’s unemployment program for the full calendar year and are in compliance with state unemployment law.
- Tax-exempt organizations. Certain tax-exempt organizations (including educational, charitable, religious, and scientific organizations) are exempt from FUTA requirements.
- State and local governments. State and local government entities are not required to pay FUTA tax on services rendered by government employees.
How to calculate your FUTA obligation
The 2023 FUTA tax rate is 6% of eligible wages, which are the first $7,000 earned by each employee in a calendar year.
You can calculate your FUTA obligations using the following formula:
FUTA liability = (eligible wages) x .06
As an example, let’s say that you are calculating your annual FUTA liabilities for a business with six employees. Two employees will earn $100,000, two employees will earn $60,000, and one employee will earn $5,000. The five employees who will earn more than $7,000 will have $7,000 in eligible wages each, and the employee who will earn $5,000 will have $5,000 in eligible wages.
Your calculation will look like this:
FUTA liability = [($7000 x 5) + $5000] x .06 = $2,400
Employers who also pay state unemployment insurance taxes (SUTA) can be eligible for a FUTA tax credit of up to 5.4% of eligible wages. See instructions for IRS Form 940 and consult with your CPA to determine your eligibility for the credit.
To calculate your FUTA liabilities after applying the federal credit, subtract your credit from the FUTA tax rate using the following formula:
FUTA rate after federal tax credit = FUTA rate - federal tax credit
An employer who earns the maximum FUTA tax credit of 5.4% is subject to an after-credit FUTA tax rate of 0.6%.
When and how to pay FUTA
FUTA compliance has two components:
- Employers must pay what they owe in FUTA taxes
- Employers must file the Employer’s Annual Federal Unemployment Tax Return
When and how to pay FUTA taxes
Businesses with FUTA liabilities of $500 or more must pay FUTA tax on a quarterly basis. Taxes are due at the end of the first month after the close of the relevant calendar quarter:
- Q1 taxes are due on April 30
- Q2 taxes are due on July 31
- Q3 taxes are due on October 31
- Q4 taxes are due on January 31
Quarterly filing obligations begin when a business owes at least $500 in FUTA taxes. Consult with your CPA to learn when and how much FUTA tax to pay.
When you owe, don’t plan on mailing a check. The federal government requires businesses to pay FUTA taxes through electronic funds transfer (EFT). Typically, businesses use the Electronic Federal Tax Payment System (EFTPS) to remit taxes.
How to file the FUTA tax return
The second component of FUTA compliance is filing Form 940, the Employer’s Annual Federal Unemployment (FUTA) Tax Return. The filing deadline is January 31 of the subsequent calendar year. As an example, 2023 FUTA reports will be due on January 31, 2024.
The Federal Unemployment Tax Return contains information about wages paid, FUTA liabilities and estimated payments by calendar quarter, and states in which the employer has made SUTA contributions.
FUTA vs. state unemployment tax (SUTA)
Many states also collect state unemployment insurance tax (SUTA), which is also known as state unemployment insurance (SUI). SUTA rates, exemptions, eligible wage bases, and payment responsibilities vary by state.
Unlike FUTA rates, SUTA rates also vary by employer. States use factors including industry, claims history, and amount of time in business to calculate an individual employer’s liabilities within a state-determined range.
Businesses that pay SUTA in full and on time can be eligible for a maximum FUTA tax credit of up to 5.4%. However, receipt of a credit is dependent on the state’s standing with the federal government. FUTA tax credits aren’t available for SUTA taxes paid to a credit reduction state, which is a state that hasn’t repaid unemployment funds borrowed from the federal government. The United States Department of Labor maintains an archive of credit reduction states and a list of potential credit reduction states for the current year.
FUTA vs. FICA
The Federal Insurance Contribution Act (FICA) requires employers to fund, withhold, and remit taxes to fund social security and Medicare taxes programs. These are sometimes referred to as FICA taxes.
Both FUTA and FICA are employment taxes, meaning they are a type of tax that employers pay directly to the IRS. FICA taxes are a specific subset of employment taxes known as payroll taxes, which are taxes funded in part by employee contributions. While employers pay 100% of FUTA taxes, both employers and employees fund FICA contributions.
The 2023 FICA contribution rate is 15.3%, and payment responsibility is split down the middle: Both employers and employees pay 7.65%.
FUTA compliance requirements
Covered businesses must record FUTA liabilities, remit taxes quarterly or whenever liabilities meet or exceed the $500 threshold, and file the Employer’s Annual Federal Unemployment Tax Return by the filing deadline.
Employers liable for FUTA are typically also liable for state unemployment tax where they have employees. Mosey automates opening unemployment tax accounts in all 50 states, plus DC. Connect your payroll provider to Mosey and we can identify gaps in your coverage, open only the right set of accounts, and alert you of new compliance requirements applicable to your business on the state and local levels.
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