Have you ever heard of a strange-sounding tax called FUTA? All employers need to know about this funky acronym because they need to pay it.
So, what is FUTA tax? Below you’ll learn about FUTA tax, the rates, and how to report and deposit the tax.
What is FUTA tax?
The Federal Unemployment Tax Act (FUTA) is a federal law that imposes an unemployment tax on employers. The FUTA tax funds the federal government’s oversight of each state’s unemployment program.
Only employers pay FUTA tax. You must deposit the tax quarterly and file an annual form.
State unemployment tax programs
Each state has its own unemployment tax to fund unemployment benefits. State unemployment taxes go by many names, depending on the state. Terms for state unemployment taxes include SUTA tax, state unemployment insurance, and reemployment tax.
When a state does not have enough money to pay for unemployment benefits, the state can borrow money from the federal government. The money the federal government lends comes from FUTA taxes.
Who must pay FUTA tax?
As mentioned before, only employers pay FUTA tax. Do not withhold anything from employee wages for this tax.
While most employers must pay FUTA tax, not all do. You must pay FUTA tax for 2019 if:
- You paid $1,500 or more in wages during any calendar quarter in 2018 or 2019, or
- You had at least one employee for at least part of a day in any 20 or more different weeks in either 2018 or 2019.
How much is FUTA tax?
The FUTA tax rate is 6%. Federal unemployment tax only applies to the first $7,000 you pay to each employee in a calendar year. This $7,000 threshold is called the wage base. Stop paying FUTA taxes on an employee’s wages once you pay the employee more than $7,000 in a year.
The largest FUTA tax amount you will pay per employee is $420 ($7,000 x 0.06).
Calculate FUTA tax every time you run payroll. This way, you will know when to stop paying FUTA tax on an employee’s wages.
FUTA tax credit
Most employers receive a FUTA tax credit on their tax rate. This credit reduces your federal unemployment tax rate.
The largest possible FUTA tax credit is 5.4%. Employers with the maximum credit only owe 0.6% (6% – 5.4%) on the first $7,000 of each employee’s wages per year. If you qualify for the maximum tax credit, the most you will pay per employee is $42 ($7,000 x 0.006).
Not all employers qualify for the maximum tax credit. If you have an employee who works in a credit reduction state, you will have a reduced FUTA tax credit.
Credit reduction states
If a state does not have enough money to cover unemployment benefits, the state must borrow money from the federal government. If the loan remains unpaid after two years, the state becomes a credit reduction state. This means employers with employees in that state will have a reduced FUTA tax credit.
For example, a state has a credit reduction of 0.3%. Employers in that state will no longer receive a maximum FUTA credit of 5.4%. Instead, the maximum credit will be 5.1% (5.4% – 0.3%). This means you would have to pay a FUTA tax rate of 0.9% (6% – 5.1%).
Depositing and reporting FUTA tax
If you have FUTA tax liabilities, you need to make quarterly deposits and file Form 940.
FUTA tax deposits
You must deposit your FUTA taxes on a quarterly basis.
You need to deposit your FUTA taxes by the last day of the month after the end of the quarter. For example, the first quarter ends on March 31. Your taxes are due by April 31.
If the due date falls on a weekend or legal holiday, make your deposit on the next business day.
|Quarter||Quarter End Date||FUTA Tax Due Date|
(January, February, March)
|March 31||April 30|
(April, May, June)
|June 30||July 31|
(July, August, September)
|September 30||October 31|
(October, November, December)
|December 31||January 31|
If your business’s payroll liability for FUTA tax is $500 or less during a calendar quarter, you don’t need to deposit your FUTA taxes at the end of the quarter. Instead, roll over your tax liability to the next quarter.
Whenever your business’s FUTA tax liability exceeds $500 during a quarter (including taxes rolled over from the previous quarter), you must deposit the tax through electronic funds transfer (EFT).
If your tax liability in the fourth quarter is more than $500, pay your FUTA tax by January 31. But, if your liability is $500 or less, you can make an EFT deposit, pay the taxes with a credit card, or pay the tax with your Form 940. For more information, see Publication 15 and the Instructions for Form 940.
FUTA tax reporting
To report your FUTA taxes, you need to file Form 940.
Form 940 is an annual form. File it by January 31 each year for the previous calendar year. For example, if you owed FUTA tax in 2019, you must file Form 940 by January 31, 2020.
If you made all your quarterly deposits on time, you can file Form 940 by February 10.
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This article is updated from its original publication date of 10/12/2015.