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Federal Unemployment Tax Act (FUTA): 10 Things to Be Aware Of
Decoding the alphabet soup of payroll tax acronyms takes time. While many descriptions sound like another, small business owners must be knowledgeable about the nuances so they can correctly file and pay required taxes. Many confuse FUTA and FICA. While FICA—the Federal Insurance Contributions Act—funds Social Security and Medicare, FUTA—Federal Unemployment Tax Act, funds unemployment benefits.
FUTA is a tax employers pay to the federal government. Unlike FICA, only employers pay this tax. Employees do not pay any FUTA tax or have it deducted from their paychecks. Reporting requirements vary based on your business type and individual employee wages.
In this article, we explore the top 10 things you need to know to help you better understand employer responsibilities of the Federal Unemployment Tax Act.
What Is FUTA Tax?
The FUTA tax, or Federal Unemployment Tax Act, requires business owners to contribute to the federal unemployment pool that covers employees who qualify for unemployment benefits. If you have at least one employee who works for at least 20 weeks out of the year or if you’ve paid employees at least $1,500 in any quarter, you are required to pay the FUTA tax.
1. FUTA Only Affects The First $7,000
If you’ve satisfied one of the requirements above, then the total FUTA tax that you are required to pay equals 6% of the first $7,000 each employee makes per calendar year. After your employee has earned $7,000 and you’ve paid the FUTA tax on those earnings, everything they make over that amount is free of FUTA tax obligations.
2. You May Qualify For A FUTA Tax Credit
If you’ve paid your SUTA (State Unemployment Tax Act) tax in a timely manner, you’ll qualify for a FUTA tax credit of up to 5.4%. That means your FUTA liability will equal 0.6%.
To calculate your true FUTA tax, multiply each employees’ earnings up to $7,000 by 0.6%.
Let’s say you have five employees: Sarah, John, Max, Alicia, and Janice. Each of these employees make between $20,000 and $40,000 per year. The first $7,000 they’ve made is subject to a reduced FUTA rate of 0.6%, because you’ve paid the SUTA tax on time.
So your total contribution to FUTA for the calendar year would be:
The first $7,000 of employee’s wages x 5 employees = $35,000$35,000 x 0.6% FUTA tax rate = $210
Keep in mind that this benefit only applies to employers who have paid their SUTA tax by the deadline. If you haven’t, your tax rate will be higher.
3. Some Employee Payments Are Exempt
FUTA only affects employee wages, not all benefits or payments that an employee receives. For example, if you’ve reimbursed an employee for certain food and hotel costs, it’s not subject to FUTA tax.
Also, if you’ve contributed to some forms of life insurance, accident or health plans, retirement accounts, dependent care, or payments related to workers’ compensation, these payments are also exempt. You’re exempt from paying FUTA taxes if your spouse, parent or child under 21 is employed by you. To review which payments are exempt from FUTA, review the guidelines established by the IRS for Form 940, the Employer's Annual Federal Unemployment (FUTA) Tax Return.
4. Payment Is Due Quarterly
The amount due for FUTA is calculated on a quarterly basis. Only payments of at least $500 are due each quarter. If your payment due is less than $500, you’re not required to pay it until the calendar quarter you’ve accumulated a total of $500 due.
Once you’ve accumulated a total of $500 or more due, a deposit for the payment needs to be made by the end of the month immediately following the quarter.
Payments for the 1st quarter are due April 30th
Payments for the 2nd quarter are due July 31st
Payments for the 3rd quarter are due October 31st
Payments for the 4th quarter are due January 31st
If you miss the payment deadline, you’ll be required to pay a penalty of between 2% and 15%, depending on how late your payment is and if you’ve received a notice from the IRS.
A payroll provider like SurePayroll can help simplify the process of paying these and other employee taxes. SurePayroll will help you stay on track with FUTA tax deadlines as well as all other tax requirements and due dates. Get your instant payroll quote here.
5. Employees Don’t Contribute
For some payroll taxes, the employee is required to pay. These can include federal taxes, state taxes, income taxes, and local taxes. Of these, an employer is required to match the amount an employee pays, as is the case with Medicare and social security.
FUTA, on the other hand, is paid solely by the employer. No FUTA tax is withheld from an employee’s paycheck. It’s a payment the employer will have to account for separately.
6. Contractors Aren’t Eligible
FUTA tax is due for full-time employees, part-time employees and temporary workers. However, similar to not withholding taxes from an independent contractor’s pay, you have no obligation to pay FUTA tax for these contractors.
7. Employers In Credit Reduction States Pay More
As we mentioned above, if you paid SUTA tax, your obligation to FUTA is calculated at a 0.6% rate. However, this only applies to employers who live in states that repaid the money it borrowed from the federal government to pay its unemployment benefits.
If you live in a credit reduction state, which is a state that hasn’t repaid this money then your FUTA tax liability will be higher. For 2022, the jurisdictions subject to FUTA Credit Reduction were California, Connecticut, Illinois, New York, and the U.S. Virgin Islands. However, it’s important that you check with the IRS on an annual basis to make sure your state isn’t subject to a reduced tax credit.
8. You May Qualify For An Installment Agreement
If you’re not able to pay the entire FUTA amount due, you may be eligible for an installment agreement. You can apply if you owe $25,000 or less and if you can pay in full in the next two years. However, you will be subject to a fee, penalties and interest on the amount not paid by the original due date.
9. You Can Designate A Third-Party
If you’re using a professional organization like SurePayroll to handle your payroll and taxes, you can give them the right to speak to the IRS about your form. That way, if the IRS has any questions about your form, if you’ve received any notices from them, or if any information is missing, they can speak directly with your designee, giving you one less thing to worry about.
10. You Must Pay Using an Electronic Funds Transfer
For all federal tax deposits, you must pay using an electronic funds transfer (EFT). You can do so using the Electronic Federal Tax Payment System® at eftps.gov. If you’re a new business owner, you were pre-enrolled when you applied for your EIN. Instructions to activate your account should have been included in the envelope where you received your EIN. Other businesses will need to enroll through the website.
Calculating your FUTA tax accurately and paying it on time is crucial to remain in good standing with the IRS. No business owner wants to pay fees, penalties, and interest on late tax payments.
Need help navigating the world of payroll and employment taxes? Turn to SurePayroll. We’re dedicated to simplifying the complexities of payroll for small business owners. SurePayroll customers can also take advantage of our 401(k) retirement plans for small business, workers’ compensation insurance and health insurance services. Learn more and start your free trial today.
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This website contains articles posted for informational and educational value. SurePayroll is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, SurePayroll. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant. If you require legal or accounting advice or need other professional assistance, you should always consult your licensed attorney, accountant or other tax professional to discuss your particular facts, circumstances and business needs.