FUTA, Federal Unemployment Tax Act

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What is the Federal Unemployment Tax Act (FUTA)?


You’ll need to know about many payroll taxes as a small business owner. 

The Federal Unemployment Tax Act (FUTA) is a payroll tax paid by employers on employee wages. The tax is 6.0% on the first $7,000 an employee earns; earnings beyond $7,000 are not taxed. In practice, the actual percentage paid is usually 0.6% (see #2 below).  

FUTA requires that employers contribute to the federal unemployment pool, covering employees who qualify for unemployment benefits. If you have at least one employee who works at least 20 weeks out of the year or have paid employees at least $1,500 in any quarter, you are responsible for paying FUTA taxes. 

Even with that understanding of FUTA taxes, you may still wonder how it impacts your small business. 

  1. The magic number is $7,000. If you are required to pay FUTA based on the criteria above, the amount you are responsible for paying equals 6% of the first $7,000 your employee makes each calendar year. After you pay on that, anything earned after $7,000 does not need to account for FUTA. 
  2. FUTA Tax Credit. Raise your hand if you like tax credits. The good news is if you pay SUTA (State Unemployment Tax Act) on time, you are eligible for a FUTA tax credit. This credit can be up to 5.4%, meaning your FUTA liability is 0.6%. 
  3. Payments are due quarterly. In the tax world, it’s common to have quarterly tax deadlines. The same applies to FUTA, with deadlines for April 30th, July 31st, October 31st, and January 31st. Make sure you pay on time, or else you could face a penalty between 2% and 15%. 
  4. Employees do not pay FUTA. There are some payroll taxes that employees contribute to, like Social Security and Medicare taxes, but FUTA is one whose sole responsibility falls on the employer. 

The Federal Unemployment Tax Act can be confusing to navigate for even the savviest of business owners.  

Besides the four points mentioned above, do you know how your contractors are affected by FUTA? Do you know if you qualify for a FUTA installment payment plan? Have you set up a third-party designee to speak to the IRS on your behalf?  

Check out our blog post FUTA: 10 Things to Be Aware Of to get your answers to these questions and more.  

Need More Help with FUTA? 

If you’re still worried about calculating unemployment and payroll taxes, it might be time to turn to an online payroll provider. Along with Social Security, Medicare, and other payroll taxes, a payroll service for small business owners will help you manage FUTA and ensure you’re remaining compliant.