The Federal Unemployment Tax Act, known as FUTA, refers to a payroll tax that employers pay on an annual or quarterly basis toward unemployment compensation for employees who have lost their jobs. This tax is also known as FUTA Liability tax.
The FUTA tax rate is 6.0% of the first $7,000.00 of an employee's wages during the year. After the first $7,000.00, employers do not have to pay any further taxes.
In addition to FUTA employer tax, employers must also pay a state unemployment tax (SUTA) to fund unemployment compensation in each state.
Who Pays Federal Unemployment Tax?
While employees contribute a percentage of their earnings toward Social Security and Medicare taxes, they do not contribute toward FUTA and SUTA taxes. This means employers do not withhold these taxes from their employees' paychecks.
Note that FUTA tax does not apply to household and agricultural employees.
As an employer, you must pay FUTA payroll tax if the following applies to you:
- You paid wages of $1,500.00 or more to employees in any calendar quarter during 2017 or 2018, or;
- You had one or more employees for at least some part of a day in any 20 or more different weeks in 2017 or 20 or more different weeks in 2018. Count all full-time, part-time, and temporary employees. However, if your business is a partnership, don't count its partners.
How to pay FUTA tax:
You can pay your FUTA taxes online via the Electronic Federal Tax Payment System (EFTPS). The EFTPS is a free service provided by the Department of the Treasury. After you have enrolled, you may pay any taxes due to the IRS using this platform.
FUTA Tax FAQs:
How do I file FUTA taxes?
Employers must file Form 940.
What is the due date for paying Federal Unemployment Tax?
The due date for filing Form 940 is January 31 each year.
FUTA Tax Calculator:
FUTA tax is calculated on taxable income i.e. the first $7,000.00 per employee per annum. FUTA tax is not deducted from an employee's paycheck. Check with your state unemployment office to find out which payments are exempted from FUTA tax.
Do small businesses get a credit or exemption?
Yes. You may receive a credit of up to 5.4% if you paid your state unemployment taxes in full on time, and your state is not a credit reduction state. The FUTA tax rate after credit is 0.6% (6.0% - 5.4% = 0.6%).
When and how must you deposit your IRS FUTA tax?
Although FUTA tax covers a calendar year, you may have to deposit your FUTA tax before you file your tax return. If your FUTA tax liability is more than $500.00 for the year, you must deposit at least one quarterly payment.
If your FUTA tax is $500.00 or less in a quarter, it must be carried over to the next quarter until the cumulative amount is more than $500.00. You must deposit your FUTA tax by the last day of the month following the end of the quarter. If your FUTA liability for the year is $500.00 or less, you can either deposit the amount or pay the tax when you file Form 940.
Once your FUTA tax liability for a quarter is more than $500, you must deposit the tax via EFT by using the Electronic Federal Tax Payment System (EFTPS).
What happens if my business is in a credit reduction state?
A credit reduction state refers to a state that has not repaid funds it borrowed from the federal government to pay unemployment compensation. If an employer in a credit reduction state pays wages, the credit that the employer may receive for paying state unemployment tax will be reduced, resulting in a greater amount of FUTA tax due. For more information, go to the IRS webpage here.
Where can I find the Federal FUTA tax form?
You can find Form 940 on the IRS website at www.irs.gov/forms-pubs/about-form-940.
What is the Federal Unemployment rate?
The tax rate for federal unemployment insurance is set at 6.0% of the first $7,000.00 of an employee's earnings.
To find out about reporting income taxes, social security tax, and Medicare taxes withheld from employees' paychecks, see our article on Form 941.