What Is the Federal Unemployment Tax Act (FUTA)?

What Is the Federal Unemployment Tax Act (FUTA)?

Let me tell you about the Federal Unemployment Tax Act, or FUTA. It's a federal law that requires you as an employer to pay a tax on your employees' wages. This tax helps fund unemployment benefits for people who are out of work. FUTA comes on top of your federal income and payroll taxes, and the money goes to state unemployment insurance agencies.

You pay FUTA taxes as the employer—your employees don't have to worry about it. The rate is 6%, and it only applies to the first $7,000 you pay each employee per year.

Key Takeaways

FUTA hits any business with employees, using the revenue to fund unemployment benefits. The tax is 6% on the first $7,000 per employee each year. It's only on employers, even though it's based on wages. FUTA and SUTA are similar but at different government levels, while FUTA and FICA fund different things and charge different parties. If you pay state unemployment taxes, you can get a federal credit up to 5.4%, dropping your effective FUTA rate to 0.6%.

Understanding the Federal Unemployment Tax Act (FUTA)

FUTA raises money to run unemployment insurance and job services in every state. As an employer, you have to pay these taxes annually or quarterly—they're part of your payroll taxes.

The rate is 6%, and per the IRS, it applies to the first $7,000 you pay each employee in wages during the year. That's the FUTA wage base. Your state's base might differ based on their rules.

The funds go to unemployment payments for workers who've lost jobs. The tax is based on wages but only you pay it as the employer—it's not taken from the employee's pay. This sets FUTA apart from taxes like Social Security, which both you and the employee split.

FUTA Tax Credit

If you pay into state unemployment funds, you might get a credit up to 5.4% on FUTA taxable wages when filing Form 940. That can bring your rate down to 0.6%. To qualify for the full credit, pay your state taxes fully and on time on the same wages subject to FUTA, and don't be in a credit reduction state.

How to Calculate FUTA Tax Liability

Calculating your FUTA liability is straightforward. You're taxed on the first $7,000 per employee, minus exempt payments, at 6%, and you might get a 5.4% credit.

Say Employee A gets $10,000 in FUTA-subject wages and Employee B gets $5,000, both in the first quarter. For A, only $7,000 counts, so total taxable is $12,000. Liability is $720 at 6%. With a $648 credit, you owe $72.

Who Pays the FUTA Tax?

You pay FUTA as the employer, but there are exceptions and thresholds based on your type of operation. Some organizations don't pay or file Form 940, while others do if they hit employee or wage limits.

Reporting Requirements for Different Employers

For businesses, you owe FUTA if you paid $1,500 or more in wages in any quarter this or last year, or had at least one employee for part of a day in 20 or more weeks this or last year. Quarters are the standard three-month periods.

Household employers—you know, hiring nannies or maids—pay if cash wages hit $1,000 or more per quarter. You can report via Schedule H on Form 1040 instead of 940.

Agricultural employers pay if cash wages to farmworkers reach $20,000 per quarter or you employed 10 or more for part of a day in 20 or more weeks.

Employers and Payments Exempt from FUTA

Indian tribal governments are exempt if they participated in the state system all year and followed laws. Religious, educational, charitable, and similar tax-exempt groups are usually exempt, except when paying for non-501(c)(3) work. State and local government services are exempt too.

Exempt payments include wages to your spouse, kids under 21, or parents, plus fringe benefits, group life insurance, and retirement contributions.

How to Pay and Report FUTA Taxes

You handle FUTA by depositing taxes and filing Form 940. Pay annually or quarterly—if you owe $500 or more yearly, make quarterly payments. Liabilities under $500 roll over. Deposits are due end of the month after quarter-end, via electronic transfer.

Reporting FUTA Taxes

File Form 940 annually by January's end, or later if deposits were timely—in 2024, it was February 12. It's on time if postmarked by the due date. You can e-file or mail based on your state. Authorized signers include owners, officers, or fiduciaries. Amend errors by refiling with the amended box checked, now possible electronically.

Federal Unemployment Tax Act (FUTA) vs. State Unemployment Tax Act (SUTA)

States often collect SUTA taxes from 0% to 20.93% on wages. Paying SUTA can give you up to 5.4% FUTA credit, netting 0.6% rate or $42 minimum per employee. If exempt from SUTA, no FUTA credit.

Federal Unemployment Tax Act (FUTA) vs. Federal Insurance Contribution Act (FICA)

FICA is split between you and employees—or all on self-employed—for Social Security and Medicare. It's deducted from paychecks, unlike FUTA which is employer-only for unemployment.

Frequently Asked Questions

FUTA is the tax employers pay at 6% on up to $7,000 per employee to fund U.S. unemployment programs, often with a 5.4% credit. FUTA funds unemployment via employers only, while FICA funds Social Security and Medicare via both parties. You're subject if wages over $1,500 per quarter or employees in 20+ weeks.

The Bottom Line

FUTA requires most employers to pay up to $420 per employee yearly for unemployment benefits. It's on you, not employees, and timely state tax payments can cut it way down.