According to the IRS, “the Federal Unemployment Tax Act (FUTA), with state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs. Most employers pay both a Federal and state unemployment tax. Only the employer pays FUTA tax; it is not deducted from the employee’s wages.” Basically, this means that employers fund the unemployment account of the federal government and possibly state governments. (State Unemployment tax is known as SUTA tax.) Generally, you will receive a credit on your Federal FUTA taxes if you paid your state unemployment taxes.

What does this mean for you as an employer? Well, it is your responsibility to make quarterly payments to the IRS so that employees receive unemployment benefits if they are terminated from employment. The tax is based on the gross pay of your employees, each payday. The tax is due each quarter (you do not have to pay if your tax liability is under $500. If the amount is less than $500 carry it to the next quarter.) In addition, employers must submit the Form 940 to the IRS annually. The Form 940 is due on January 31st each year unless the amount due for the year has been paid. Then the due date is February 10th. Preparing the Form 940 can get complicated if you live in a state that also requires SUTA to be paid. At the end of every year, you must pay any FUTA amount due from the previous year when you submit your Form 940.

When to Deposit FUTA Taxes:

Quarter  Ending Due Date
Jan – Feb – Mar Mar. 31 Apr. 30
Apr – May – June  June 30  July 31
July-Aug-Sept Sept. 30 Oct. 31
Oct-Nov-Dec Dec 31 Jan 31 Dec 31 Jan 31

In general: employers must pay a tax rate of 6% on the first $7,000 that each employee earns (a reminder that you do not have to pay independent contractors FUTA taxes because they are not employees.) Fortunately, if you pay SUTA taxes the amount that you pay to the federal government may be reduced by as much as 5.4%. This means that you can end up paying as little as 0.6% on the first $7,000 each employee earns. Basically, the most you will end up paying for each employee is $42 per employee for the year unless you live in a “credit reduction state.” Very few states are considered credit reduction states. In 2017, only California and the Virgin Islands were subject to a credit reduction. These states do not have to pay the 0.6%. They pay more at 2.1%, which means they pay $147 per employee versus the $42 of the other states.

According to the IRS there are three tests used to determine if you must pay FUTA tax; a general test, household employees test, and farmworkers employees test.

General Test:

You’re subject to FUTA tax on the wages you pay employees who aren’t household or agricultural employees and must file Form 940.pdf, Employer’s Annual Federal Unemployment (FUTA) Tax Return, for 2017 if:

· You paid wages of $1,500 or more to employees in any calendar quarter during 2016 or 2017, or

· You had one or more employees for at least some part of a day in any 20 or more different weeks in 2016 or 20 or more different weeks in 2017. Count all full-time, part-time, and temporary employees. However, if your business is a partnership, don’t count its partners.

Household employees and farmworkers tests: (See the IRS website Topic Number 759 – Form 940 for more information.)

· FUTA tax rate: The FUTA tax rate is 6.0%. The tax applies to the first $7,000 you paid to each employee as wages during the year. The $7,000 is often referred to as the federal or FUTA wage base. Your state wage base may be different.

· Generally, if you paid wages subject to state unemployment tax, you may receive a credit of up to 5.4% when you file your Form 940. If you’re entitled to the maximum 5.4% credit, the FUTA tax rate after credit is 0.6%. Generally, you’re entitled to the maximum credit if you paid your state unemployment taxes in full on time, and the state isn’t determined to be a credit reduction state. See the Instructions for Form 940 to determine the credit.

Summary: If an employee becomes unemployed, they might be able to receive unemployment benefits. As an employer, you are responsible for paying FUTA taxes. This can be time-consuming and stressful. I know I am thoroughly confused researching this topic, so I suggest that you focus on your business, and let the Payroll Source Group handle your FUTA taxes.


By Betsy Drellack

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