What is FUTA tax?
As an employer, more than likely you pay the Federal Unemployment Tax Act (FUTA) tax. But just what is FUTA tax and what do you need to know to comply?
FUTA provides for unemployment compensation for workers who lose their jobs. Employers pay the full amount of the tax for each employee. In other words, nothing is deducted from an employee’s pay. In addition to FUTA, most businesses also pay a state unemployment tax.
In general, most businesses other than those exempted like nonprofits and religious organizations must pay FUTA taxes. Specifically, employers are responsible if they paid wages of $1,500 or more or had at least one employee for some part of a day in 20 or more different weeks in the calendar year. Moreover, there are specific tests to determine if you owe FUTA taxes for household employees or farmworkers.
The FUTA Tax Rate
The FUTA tax rate is currently 6.0%. The federal tax applies to the first $7,000 in wages you pay each employee during a calendar year after subtracting any exempt payments. The good news is that companies can qualify for a tax credit of up to 5.4% based on their timely payment of state unemployment taxes. So for these businesses, the rate would be as low as .6%. Just be aware that employers in a credit reduction state, listed here, can’t claim the full credit.
Payment of FUTA Taxes
When you need to pay FUTA taxes depends on how much you owe. For example, if your tax is more than $500 in any quarter, you need to make a quarterly payment. If your tax is $500 or less, then you carry it over to the next quarter and/or the next until your cumulative tax is more than $500. At that time, you’ll need to deposit your tax for the quarter. If, by the end of the fourth quarter, your FUTA tax is $500 or less, you can either deposit the amount or pay it with Form 940.
The quarterly due dates for FUTA taxes are as follows:
- Q1 – due April 30
- Q2 – due July 31
- Q3 – due October 31
- Q4 – due January 31
While the CARES Act extended the deadline for paying the employer’s share of Social Security taxes owed for wages paid from March 27 through the end of the year, the FUTA deadlines did not change. Moreover, the employee retention credit provided for in the Act allows employers to offset federal payroll taxes, including federal withholding tax and their share of Social Security tax and Medicare, but not FUTA.
To report annual FUTA tax payments, employers use IRS Form 940. The form must be filed by January 31; however, if you deposited all tax when it was due, then you don’t need to file it until the second Monday in February. Remember to pay on time or you’ll risk late payment penalties.
For more information about the Federal Unemployment Tax Act and the tax you may owe, contact Complete Payroll Solutions at 866.658.8800.