Federal Unemployment Tax Act

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Federal Unemployment Tax Act (FUTA)

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; any earnings beyond $7,000 are not taxed. In practice, the actual percentage paid is usually 0.6%. This is because employers receive a credit of up to 5.4% for any state unemployment taxes they pay. While almost all small business owners will get the full 5.4% credit, it is still important to check state unemployment tax regulations to insure eligibility.

Certain income is exempt from FUTA taxes and does not count towards the $7,000 base. Mileage reimbursement, insurance premiums and other fringe benefits, in general, do not count. A complete list of what counts and what doesn't count can be found in Publication 15 (Circular E) and Publication 15-A (Supplement to Publication 15 Circular E). These publications can also further help to explain FUTA taxes.

Small business owners get a couple of breaks from the IRS on FUTA taxes. The first is in the payment of the tax. The IRS normally requires businesses to pay FUTA taxes quarterly. However, for many small businesses this may not be necessary. This is because the IRS only requires a payment if the FUTA taxes owed are more than $500. If the taxes owed are less than $500 (which will be the case for many small businesses) then the balance can be carried over to the next quarter. This can be done until the end of the year, or until at least $500 in taxes are owed.

The second is that certain family members may be exempt from FUTA taxes. Children employed by parents, parents employed by children, and spouses employed by spouses may be exempt depending on the type of business owned. Publications 15 (Circular E) and 15-A (Supplement to Publication 15 Circular E) explain this in more detail.

The Federal Unemployment Tax Act requires employers to file Form 940 at the end of the year. Along with this form, any FUTA taxes owed must be paid. This form is due January 31 of the following tax year (e.g., January 31, 2018 for tax year 2017).

Remember FUTA taxes are paid by employers — nothing is deducted from an employee's paycheck.