Federal Unemployment Tax Act (FUTA)

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What is the Federal Unemployment Tax Act (FUTA)?

As a small business owner, there are many payroll taxes you’ll need to know about.

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%. FUTA requires that employers contribute to the federal unemployment pool which covers 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.

With that understanding of what FUTA taxes are, you may still be wondering 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 for FUTA with deadlines of: 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 that the sole responsibility falls on the employer.

While these are some of the top things you should understand about FUTA, if you’re hungry for more information, we have a blog post with six more tips to help you out.

Because calculating payroll taxes can be confusing and overwhelming, turning to an online payroll provider can help. Along with Social Security, Medicare, and other payroll taxes, a payroll service for small business owners can also help manage FUTA and ensure that you’re remaining compliant.