What is the Federal Unemployment Tax Act (FUTA)?

Compare Small Business Loans

$

on LendingTree's secure website

{"buttonText":"See Offers","buttonDisclaimer":"on LendingTree's secure website","customEventLabel":"","formID":"us-quote-form--small-business-loan-685e45e9882c1c3","submitURL":"\/small-business\/compare\/value_1","title":"Compare Small Business Loans"}

The Federal Unemployment Tax Act (FUTA) is a federal law that established an unemployment tax. Most businesses with employees must pay FUTA taxes quarterly or annually. Unlike other payroll taxes that an employer withholds from employee wages, FUTA taxes are paid entirely by the employer.

Read on for more information that employers need to know about this necessary cost of hiring employees.

What is FUTA?

FUTA stands for the Federal Unemployment Tax Act. The law was initially passed in 1939 to provide involuntarily unemployed workers with temporary, partial wage replacement to prevent dependence on welfare and stimulate the economy during recessions. The law established a joint federal and state system of unemployment insurance.

Employers nationwide are taxed on the wages paid to their employees. The federal unemployment tax rate for 2019 is 6% of the first $7,000 in gross wages paid annually to each employee. That $7,000 cap is known as the federal wage base.

FUTA tax rates don’t change as often as many other tax rates. The 6% FUTA tax rate has been in place since July 2011, while the $7,000 federal wage base has been in place even longer, since 1983. Employers may be eligible for a tax credit of up to 5.4%, reducing the overall impact from 6% to 0.6%. How you fill out Form 940 will determine your tax credit (we’ll talk more about the credit and Form 940, below).

Who pays for federal unemployment taxes?

There are three tests to determine whether an employer must pay FUTA tax.

  1. General test. Employers must pay FUTA tax on wages paid to employees who aren’t household or agricultural employees if:
    • They paid wages of $1,500 or more to employees during any calendar quarter, or
    • They paid one or more employees for at least some part of a day in any 20 or more different weeks during the calendar year. This includes all full-time, part-time and temporary employees, but not partners in a partnership.
  2. Household employees test. Anyone who hires a household employee (such as a housekeeper, maid, babysitter or gardener) to perform work in a private home must pay FUTA tax if they paid total cash wages of $1,000 or more to household employees in any calendar quarter.
  3. Farmworkers test. Businesses that hire farmworkers must pay FUTA tax if:
    • They paid cash wages of $20,000 or more during any calendar quarter
    • They employ 10 or more farmworkers during at least some part of a day during any 20 or more weeks of the calendar year.

FUTA vs. SUTA

The State Unemployment Tax Act (SUTA) was developed alongside the federal unemployment tax to create state unemployment insurance funds. Some states have their own names for the SUTA tax, such as State Unemployment Insurance (SUI) or Reemployment Tax, as it is known in Florida.

If the employer pays into a state unemployment insurance fund and the state’s unemployment insurance system meets certain requirements established by federal law, the employer can claim a credit of up to 5.4% of FUTA taxable wages. Employers that are eligible for the full 5.4% credit pay a FUTA tax rate of only 0.6%.

To qualify for the full credit, the employer must:

  • Pay state unemployment taxes in full and on time
  • Pay state unemployment taxes on the same wages as are subject to FUTA tax
  • Not pay into a state fund in a credit reduction state.

A credit reduction state is one that has taken loans from the federal government to meet its state unemployment benefits liabilities and hasn’t repaid those loans as agreed. The U.S. Department of Labor maintains a list of historical and potential credit reduction states; as of July 2019, the U.S. Virgin Islands is the only jurisdiction considered a credit reduction state.

Each state has its own rules for who must pay state unemployment taxes and how those taxes are calculated. The U.S. Department of Labor’s Comparison of State Unemployment Insurance Laws provides state-by-state information on:

  • The minimum period of time or minimum payroll before an employer must pay state unemployment taxes tax
  • The taxable wage base applicable to each state
  • The minimum and maximum rates that apply in each state. Currently, the rates range from as low as 0% to as high as 18.55%.

How is FUTA calculated?

Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, is the form used to calculate and report FUTA taxes.

Essentially, you’ll enter total taxable FUTA wages (the first $7,000 of wages paid to each employee during the calendar year) and multiply it by the minimum FUTA tax of 0.6%.

In many states, the wages subject to SUTA taxes are the same as those subject to the FUTA tax. However, some states exclude certain wages from SUTA, including those paid to corporate officers, and sick pay paid by unions, as well as certain fringe benefits. Check with your state’s SUTA requirements to determine if your company’s FUTA wages are different from those used to calculate SUTA.

If some or all your employees’ wages were excluded from state unemployment taxes, or if you paid your state unemployment taxes late, you’ll multiply those wages by the rest of the FUTA tax rate of 5.4%. This brings you to your FUTA tax after adjustments. If you overpaid your FUTA tax in a prior year or made any quarterly deposits, you can reduce the amount owed by the overpayment or deposits. To keep your FUTA tax low, be sure to pay your state unemployment taxes in full and on time to qualify for the full credit.

How to pay FUTA taxes

As mentioned above, you can calculate and report FUTA taxes using Form 940. Typically, Form 940 is due by Jan. 31. However, some employers are required to deposit FUTA taxes quarterly.

Employers must make quarterly deposits toward their FUTA tax liability if their tax is more than $500 for the calendar year. If the FUTA tax liability is less than $500 in a quarter, the employer can carry it over to the next quarter.

Here are the deadlines if you must pay quarterly FUTA taxes:

QuarterDeadline
First QuarterApril 30
Second QuarterJuly 31
Third QuarterOct. 31
Fourth QuarterJan. 31

If you’ve made quarterly deposits of FUTA taxes when they were due, you’ll get a little extra time to file Form 940. In that case, it will be due on Feb. 11. The mailing addresses for submitting Form 940 are included in the Instructions for Form 940. A draft of instructions for the 2019 tax year may be found here.

The IRS requires all employers to make deposits of their FUTA taxes using its EFTPS system. You can enroll in EFTPS here. The IRS automatically pre-enrolls new businesses in EFTPS when the employer applies for an Employer Identification Number.

Most states require employers to file and pay SUTA taxes quarterly, although the actual due date of those quarterly reports may vary. Check with your state’s unemployment tax office for more information on how to file and pay your state unemployment taxes.

FAQ

What is FUTA?

FUTA stands for Federal Unemployment Tax Act, a federal law that imposes an unemployment tax on employers to help provide temporary compensation for workers who have lost their jobs.

Do employees pay FUTA tax?

Only employers pay FUTA tax. It isn’t withheld from the employee’s wages.

Who is exempt from FUTA and SUTA?

Most employers pay both FUTA and state unemployment taxes (SUTA). In general, an employer must pay FUTA taxes if they paid wages of $1,500 or more in any calendar quarter or had one or more employees for at least some part of a day in 20 or more weeks during the calendar year. Different guidelines apply to employers of household workers and farmworkers.

Each state has its own rules for who is exempt from SUTA taxes. The U.S. Department of Labor’s Comparison of State Unemployment Insurance Laws (mentioned above) provides state-by-state information on the limits and exemptions applicable to each state.

What is the difference between FUTA and SUTA?

FUTA is paid to the federal government, while SUTA taxes (also called state unemployment insurance or reemployment taxes) are paid to state funds. Employers that pay their SUTA taxes on time may be eligible to receive a credit toward their FUTA tax liability.

What is FUTA tax used for?

FUTA taxes are used to:

  • Help fund the administration of job service programs in all states,
  • Cover the cost of extended unemployment benefits during periods of high unemployment, and
  • Provide a fund from which state unemployment insurance funds may borrow to pay benefits.

Comments and Questions