What Is FUTA? Definition and How to Calculate FUTA Liability

What Is the Federal Unemployment Tax Act (FUTA)?

The Federal Unemployment Tax Act (FUTA) is a piece of legislation that imposes a payroll tax on any business with employees. The revenue it generates is allocated to state unemployment insurance agencies and used to fund unemployment benefits for people who are out of work.

Key Takeaways

  • The Federal Unemployment Tax Act (FUTA) is legislation that imposes a payroll tax on any business with employees; the revenue raised is used to fund unemployment benefits. 
  • As of 2021, the FUTA tax rate is 6% of the first $7,000 paid to each employee annually.
  • Though FUTA payroll tax is based on employees' wages, it is imposed on employers only, not their employees.
  • FUTA and SUTA are similar taxes just imposed on different levels of government, while FUTA and FICA fund entirely different programs by charging different individuals.
  • Employers who also pay their state unemployment insurance can receive a federal tax credit of up to 5.4%, resulting in an effective FUTA tax rate of 0.6%.

Understanding the Federal Unemployment Tax Act (FUTA)

FUTA is a federal law that raises revenue to administer unemployment insurance and job service programs in every state. As directed by the Act, employers are required to pay annual or quarterly federal unemployment taxes; they make up a part of what is commonly known as payroll taxes.

The funds in the account are used for unemployment compensation payments to workers who have lost their jobs. Although the amount of the FUTA payroll tax is based on employees' wages, it is imposed on employers only, not their employees. In other words, it is not deducted from a worker's wages. In this way, FUTA differs from other payroll taxes such as Social Security tax, which applies to both employers and employees.

The Federal Unemployment Tax Act requires employers to file IRS Form 940 annually to report the paying of their FUTA taxes. IRS Form 940 generally must be filed in the first quarter of the year.

Who Needs to Pay FUTA

The reporting requirements for FUTA vary on the underlying entity that is remitting the taxes to the IRS. FUTA taxes can be paid annually or quarterly, and the amount of an employer's FUTA tax liability determines when the tax must be paid. Here are the different reporting requirements for various types of entities or employers.

FUTA Reporting Requirements - Businesses

According to the IRS, a bueinss owes FUTA if it meets one of two requirements. There are two broad measurements to determine whether a business must collect and remit FUTA, and a company only needs to satisfy one of the two following conditions in order to be required to remit FUTA:

  1. It paid at least $1,500 in wages during any calendar quarter in the current or previous year. (A calendar quarter is January through March, April through June, July through September, or October through December.)
  2. It had at least one full-time, part-time, or temporary employee for at least some part of a day in any 20 or more different weeks in the current or previous year.

FUTA Reporting Requirements - Household Employers

There is a different set of reporting requirements for household employers, those who hire a nanny, babysitter, maid, housekeeper, or other people to provide services within one's private home. Household employees must pay FUTA tax on wages if the following two conditions are met:

  1. Cash wages of $1,000 or more were paid to a household employee in any quarter during the year.
  2. The household employee performs household work in a private home, local college club, or local chapter of a college fraternity.

Household employers can opt to file and report FUTA taxes using Schedule H via Form 1040 instead of Form 940.

FUTA Reporting Requirements - Agricultural Employers

Yet another varying set of requirements exist for agricultural or farming employers. If the employer meets either of the conditions below, they are subject to FUTA tax collection and reporting:

  1. Cash wages of $20,000 or more were paid to farmworkers during any calendar quarter during the year.
  2. 10 or more farmworkers were employed during some part of the day during any 20 or more varying weeks within a calendar year.

FUTA Reporting Requirements - Other Employers

Indian tribal governments are exempt from FUTA tax. However, the tribe must have participated in the state unemployment system for the entire year and be compliant with prevailing unemployment laws. Religious, educational, scientific, charitable, or other tax-exempt organizations are also exempt from FUTA. Last, services performed by state or local government parties are also exempt.

If you're filing your last Form 940 because your business has closed or you have stopped paying wages, you can select Box D in the top right corner of the form to notify the IRS.

How to Calculate FUTA Tax Liability

A company's FUTA tax liability is fairly straightforward to calculate. A company is subject to FUTA taxes on the first $7,000 of payments made to an employee excluding exempt payments. The FUTA tax rate for 2021 was 6.0%, and employers often receive a credit of up to 5.4% against this tax.

For example, imagine Employee A was paid $10,000 of wages subject to FUTA taxes in Q1 and Employee B was paid $5,000 of wages subject to FUTA taxes in Q1. Regarding Employee A, only the first $7,000 of wages per quarter are subject to the tax. Therefore, the tax liability is:

FUTA Liability = (Employee A's Eligible Wages + Employee B's Eligible Wages) * 6%

FUTA Liability = ($7,000 + $5,000) * $6%

The company's FUTA tax liability would be $720. Note that the company may be eligible for a tax credit of $648 ($12,000 * 5.4%); if this is the case, the company would only owe $72.

How to Pay and Report FUTA

There's two components to FUTA: depositing FUTA taxes and filing the appropriate tax form. Companies that owe $500 or more of FUTA in a calendar year must remit FUTA taxes to the IRS at least quarterly. The IRS permits any single quarterly tax liability less than $500 to be rolled to the next period.

Generally speaking, FUTA must usually be deposited at the end of the month subsequent to quarter-end. For example, with the first quarter ending March 31, FUTA taxes in Q1 are due for deposit by April 30. In addition, the IRS requires all federal tax deposits be made via EFT.

The tax form is often due in full early in the calendar year. The due date for filing Form 940 in 2021 was Jan. 31, 2022. Taxpayers who have already deposited their FUTA taxes to the IRS had until Feb. 10, 2022 to file. The IRS considers Form 940 filed on time should tbe form be properly addressed and postmarked prior to the due date.

FUTA can be reported via Form 940 electronically using the IRS' electronic filing platform. Taxpayers wanting to mail in a paper form will have varying mailing addresses based on the state they are in.

If the due date for filing falls on a Saturday, Sunday, or legal holiday, IRS guidelines mandate that the return is subsequently due the next business day.

FUTA vs. SUTA

Many states collect an additional unemployment tax from employers, known as state unemployment taxes (SUTA). These range from 2% to 5% of an employee's wages.

Paying SUTA taxes can lessen the burden of FUTA taxes. Employers can take a tax credit of up to 5.4% of taxable income if they pay state unemployment taxes in full and on time. This amount is deducted from the amount of employee federal unemployment taxes owed.

An employer that qualifies for the highest credit will have a net tax rate of 0.6% (calculated as 6% minus 5.4%). Thus, the minimum amount an employer can pay in FUTA tax is $42 per employee. However, companies that are exempt from state unemployment taxes do not qualify for the FUTA credit.

FUTA vs. FICA

While FUTA is used to fund unemployment benefits, Federal Insurance Contribution Act (FICA) taxes are different in several ways. First, FICA is paid for by both the employer and employee. The tax is split evenly between the two, though self-employed individuals must often report both portions.

Second, FICA is intended to fund different government programs. FICA is used to provide Social Security and Medicare benefits. It is automatically deducted from employee paychecks, and federal law dictates that it is furnished by workers and their employers.

Special Considerations

Wages that an employer pays to their spouse, a child under the age of 21, or parents do not count as FUTA wages. Furthermore, payments such as fringe benefits, group term life insurance benefits, and employer contributions to employee retirement accounts are not included in the tax calculation for the federal unemployment tax.

Form 940 can be amended for a previous year. When the prior year information needs to be updated, the IRS requests using the subsequent year to reflect the change. For example, an amendment to the 2020 Form 940 would be done using the 2021 filing.

There are various authorized personnel allowed to sign Form 940 and remit the reporting of FUTA taxes. In general, a business-owner, president, vice president, principal officer, fiduciary overseeing an estate, authorized partner, or officer knowing the affairs of a company may be allowed to sign the form.

What Is FUTA?

FUTA is a payroll tax imposed on employers to fund unemployment programs in the United States. A company is usually responsible for a tax of 6% on every employee's wages up to $7,000 per quarter. A company may often be eligible to receive a credit of up to 5.4%.

What Is the Difference Between FUTA and SUTA?

FUTA and SUTA are essentially the same type of payroll tax used to fund government unemployment programs. However, FUTA is assessed at the federal level, while SUTA is assessed at the state level.

What Is the Difference Between FUTA and FICA?

FUTA is a payroll tax implemented on just an employer to help fund federal unemployment programs. FICA is a payroll tax implemented on both the employer and employee that provides funding for Medicare and Social Security.

Who Is Subject to FUTA?

Most businesses are subject to FUTA if they have employees. If a company paid wages of more than $1,500 to employees in any calendar quarter during the year, they are subject to FUTA. In addition, if one or more employees worked part of a day in 20 or more different weeks during the year, the company they work for is subject to FUTA.

Is FUTA Paid By the Employer?

Yes, FUTA is paid for by the employer. Unlike other payroll taxes, FUTA is not deducted from an employee's paycheck, and all tax liability for FUTA resides with the employer.

Article Sources
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  1. Internal Revenue Service. "Topic No. 759 Form 940– Employer's Annual Federal Unemployment (FUTA) Tax Return – Filing and Deposit Requirements."

  2. Internal Revenue Service. "Instructions for Form 940."

  3. Internal Revenue Service. "Employment e-File."

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