The Federal Unemployment Tax Act (FUTA) is a legislation that imposes a tax on employers used to allocate funds for unemployment compensation. Unlike other payroll taxes, such as Social Security and Medicare, only employers pay FUTA tax. Therefore, you do not deduct or collect FUTA taxes from your employees.
To determine if you owe FUTA tax, the IRS provides three tests: a general test, a household employee’s test, and a farmworkers employees test. In this blog post, we will focus on the general test. Under this test, you must pay FUTA tax for an employee and file a Form 940 if:
You paid that employee $1,500 or more during any calendar quarter in the current or previous year, or
That employee worked at least part-time in twenty or more different weeks in the current or previous year (this includes full-time, part-time, and temporary employees).
Federal Tax Rate
As of 2022, the FUTA tax rate is 6%, however, this only applies to the first $7,000 paid to each employee annually. Once an employee’s wage exceeds $7,000, then you no longer need to pay FUTA tax on their wages. Therefore, If you paid an employee at least $7,000, the maximum amount for FUTA you would pay would be $420 (6% x $7,000)
Form 940
In addition to your tax payments, you will need to file a Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return every year. This form helps you determine your FUTA tax, reports your tax liability by quarter, and provides a payment voucher.
Paying FUTA
FUTA tax payments may be due annually or quarterly, depending on how much you owe.
Annually: If you owe less than $500 in FUTA taxes, you can pay the tax annually by mailing in the payment voucher when you file Form 940.
Quarterly: If you owe $500 or more in FUTA taxes during the calendar year, you will need to make quarterly payments. However, you only need to make payments for quarters that exceed $500. If you have a quarter with less than $500 of FUTA tax liability, you can roll that payment into the next quarter when the tax liability has reached $500. The deadline to pay quarterly is the last day of the month after the end of the quarter. Quarterly payments must be deposited by electronic funds transfer, generally through EFTPS.
Deadline to File
The deadline to file Form 940 is January 31. However, for those who have deposited FUTA taxes on time throughout the calendar year, you may file by February 10. When the due date falls on a weekend or legal holiday, the form is due on the next business day.
FUTA Tax Credit
State unemployment tax may be eligible for a maximum credit of up to 5.4%, bringing the FUTA tax rate to 0.6% (6% minus the 5.4% tax credit). Eligibility for this credit depends on if you pay SUI in full on time and whether you live in a credit reduction state.
Please keep in mind that taxes are constantly changing, so for the most current information, visit irs.gov.
Need Help Filing?
Our knowledgeable and professional team of bookkeepers can take the pressure off the payroll and keep up with all the complicated taxes so that you can focus on growing your business. We can help you prepare state and federal payroll tax returns including Form 940, Form 941, L&I Quarterly Reports, and SUI. Contact us or give us a call at (360) 756-5020 to speak to one of our bookkeepers!