FUTA, Federal Unemployment Tax Act

Small Business Payroll Taxes: What is FUTA (Federal Unemployment Tax Act)

Many business owners consult with an accountant, bookkeeper or tax professional on how to set up payroll. Others opt to use a payroll service to help them manage the complexities involved in small business payroll and payroll taxes.

Whether you’re planning to do payroll yourself, hire a financial professional or work with a payroll service provider, it’s a good idea to learn how to do payroll.

Federal Payroll Taxes

Employers face a series of federal, state and local payroll tax deadlines throughout the year. Meeting the deadlines, complete with the correct forms, is essential. Common payroll mistakes like missing deadlines, miscalculating amounts or filing incorrectly can result in hefty fines and penalties.

Federal payroll taxes include:

• federal income tax withholding
• Social Security and Medicare taxes (collectively called Federal Insurance Contributions Act or FICA)
• Federal Unemployment Tax Act (FUTA) taxes

What is FUTA?

FUTA, or the Federal Unemployment Tax Act, requires employers to contribute to the federal unemployment pool to cover employees who qualify for unemployment benefits.

You must pay FUTA if you:

• paid wages of $1,500 or more to employees in any calendar quarter during the current or previous year.
• have one or more employees for at least some part of a day in any 20 or more different weeks in the current or previous year.

It’s important to note that employers are solely responsible for paying FUTA taxes based on employee wages. FUTA is not deducted from employee wages.

How to Calculate FUTA

The standard FUTA rate is 6%. It is capped at the first $7,000 in wages paid to each employee.

There’s good news. If you pay state unemployment taxes on time, you may be eligible for a FUTA tax credit of up to 5.4%. That could bring your net FUTA rate down to 0.6%.

Here’s an example: One employee earns $12,000 in wages. Only the first $7,000 is subject to the 6% FUTA tax. Your tax liability for that employee would be $420 (7,000 x 6% = $420). If you are eligible for the 5.4% federal tax credit, your FUTA tax would be $42 (7,000 x 0.6% = $42) for that employee.

You complete the same calculation for each employee to figure out the total FUTA tax you owe.

State unemployment insurance rates vary, so be sure to check the rules in your state.

When and How to Pay FUTA

FUTA taxes are due quarterly on January 31, April 30, July 31 and October 31. Missing a payment can trigger penalties between 2% and 15%.

If your total FUTA liability is more than $500 for the calendar year, you must deposit at least one quarterly payment. However, if your FUTA tax liability is $500 or less in a quarter, you can carry it forward until the cumulative liability is more than $500. Then you must deposit the total FUTA tax you owe that quarter.

The IRS requires electronic fund transfers (EFT) for all federal payroll tax deposits. You can complete the EFT using the Electronic Federal Tax Payment System.

If you don’t exceed the $500 threshold in a year, you can pay FUTA tax when you file Form 940, Employers Annual Federal Unemployment Tax Return. The filing deadline is January 31 for the previous calendar year.

Employers who deposited all FUTA tax when it was due throughout the year have until February 10 to file.

Easy Payroll and Tax Management

You’re an expert in your field. You don’t need to be one in payroll and payroll tax management. The right payroll service provider can help you stay focused on your business, customers and employees.

The easy, affordable solutions from SurePayroll® By Paychex help simplify the complexities of payroll and tax management, giving you the freedom to focus on your business.

Have questions? Connect to see how we can help simplify your success at SurePayroll.