Have you ever heard of a strange-sounding term called FUTA? All employers need to know about the Federal Unemployment Tax Act (FUTA) tax.
After you’ve read this article, you’ll be able to answer “What is FUTA tax?” You’ll also know about the tax rates, when to pay the tax, and what form you need to file.
What is FUTA?
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; there is not a withholding from employee wages. Employers 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 Tax Act 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 out comes from FUTA taxes.
Who must pay FUTA tax?
Only employers pay FUTA tax. The amount of tax you pay depends on how much you pay employees. Even though tax for FUTA is based on employee wages, you will not withhold FUTA tax from employee paychecks.
While most employers must pay FUTA tax, not all do. You must pay FUTA tax if:
- You paid $1,500 or more in wages during any calendar quarter in 2016 or 2017, or
- You had at least one employee for at least part of a day in any 20 or more different weeks in either 2016 or 2017.
How much is FUTA tax?
The 2017 FUTA tax rate is 6% (or 0.06). Federal unemployment tax only applies to the first $7,000 you pay to each employee in a calendar year. You will stop paying FUTA taxes on an employee’s wages once you pay the employee more than $7,000. In 2017, the largest FUTA amount you will have to pay is $420 per employee ($7,000 x 0.06).
FUTA tax credit
Most employers can receive a credit on their FUTA tax rate. The credit reduces your federal unemployment tax rate.
The largest possible credit is 5.4% (or 0.054). Employers with the maximum credit only owe 0.6% (or 0.006) on the first $7,000 of each employee’s wages. If you have the maximum tax credit, the lowest FUTA liability you can have is $42 per employee ($7,000 x 0.006).
You might have a credit less than 5.4%. Your credit depends on if you paid your state unemployment taxes in full and on time, and as long as your business’s state isn’t a credit reduction state. If your state unemployment tax payments are partial or late, or if your business is in a credit reduction state, you will have a greater FUTA tax rate.
There is a worksheet in the Instructions for Form 940 that can help you determine your credit.
Credit reduction states
If your 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 in that state will have their FUTA tax credit reduced.
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 possible credit will be 5.1% (5.4% – 0.3%).
The current credit reduction states are:
- The U.S. Virgin Islands
For more information on credit reduction states and the reduction rates, see the Instructions for Form 940. Also, use Schedule A (Form 940) to calculate your tax for FUTA if your business is in a credit reduction state.
Tax deposits and filing
If you have FUTA tax liabilities, you need to make quarterly deposits and file Form 940.
FUTA tax deposits
You need to calculate and deposit your FUTA taxes on a quarterly basis.
If your business’s payroll liability for FUTA tax is $500 or less during a quarter, you don’t have to deposit your taxes at the end of the quarter. You can roll over your tax liability to the next quarter and see if you need to make a deposit then.
If your business’s FUTA tax liability exceeds $500 during a quarter (including taxes rolled over from the previous quarter), you must deposit your FUTA taxes.
You must deposit FUTA taxes by using electronic funds transfer (EFT). Usually, EFT payments are made using the Electronic Federal Tax Payment System (EFTPS). You can also arrange for a tax professional, financial institution, or payroll service to make EFT deposits for you. Or, your financial institution can make a same-day wire transfer.
When to deposit
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 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.
You need to report your FUTA tax liabilities. To do this, you need to file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.
Form 940 is due by January 31 each year. So, if you owed taxes for FUTA in 2016, your Form 940 is due by January 31, 2017.
If you deposited all your FUTA tax liabilities on time, you can file your Form 940 by February 10.
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This article was updated from its publication on 10/12/2015.