FUTA tax is among several employment-related taxes that businesses with payroll must pay to the government. FUTA (the Federal Unemployment Tax Act) initiated a program that works along with state unemployment programs to pay benefits to workers who have lost their jobs through no fault of their own.
Employers pay the 6% FUTA tax and no portion of the tax is deducted or withheld from employees’ wages or salaries. The first $7,000 paid to each employee during the year (after deducting any FUTA-exempt payments) is subject to FUTA tax.
Employers report their tax liability annually on IRS Form 940, but quarterly tax deposits may be required. The maximum FUTA tax an employer must pay per employee per year is $420 ($7,000 x .06). Generally, employers who pay state unemployment tax on employees’ wages can receive up to a 5.4% credit on their FUTA tax obligations.
If you’d like to dig into payroll a little more, you can read more on our website:
Who Must Pay FUTA Tax?
The IRS’s general criteria for determining if an employer is subject to FUTA tax include:
- The employer has paid at least $1,500 to employees in any calendar quarter in the current or previous year.
- The employer had one or more employees working at least some portion of the day in 20 or more weeks in the current or previous year.
After an employee’s year-to-date wages exceed $7,000, the employer is not responsible for FUTA on the employee’s subsequent wages in the year.
Note that the IRS has special conditions for employers with household or agricultural employees.
Deadlines for Reporting and Paying FUTA Tax
Although employers report their FUTA tax responsibility annually on IRS Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, they must calculate their tax liability for each quarter.
Employers must deposit their tax quarterly when their FUTA tax responsibility is more than $500 in a quarter. If the tax is $500 or less in a quarter, it is carried over to the next quarter. The IRS instructs employers to continue carrying over their tax liability until their cumulative tax exceeds $500. At that point, they deposit their tax payment for the quarter (and any subsequent quarters with undeposited tax due).
When tax payments are required, employers must deposit them by electronic funds transfer using the Electronic Federal Tax Payment System (EFTPS).
IRS Due Dates for Depositing FUTA Tax
- April 30 – If the undeposited FUTA Tax responsibility is over $500 on March 31
- July 31 – If the undeposited FUTA Tax responsibility is over $500 on June 30
- October 31 – If the undeposited FUTA Tax responsibility is over $500 on September 30
- January 31 – If the undeposited FUTA Tax responsibility is over $500 on December 31
IRS Due Date for Filing Form 940
Employers who deposited all their FUTA tax for the calendar year when it was due have until February 10 to file their annual federal unemployment tax return. Others must file Form 940 by January 31. If the due dates fall on a weekend or legal holiday, the deadline moves to the next business day.
The IRS encourages employers to file their forms online. Alternatively, they may file a paper return and mail it to the appropriate address (which depends on the state and whether or not the return will include a payment).
What is the FUTA Rate for Employers?
The FUTA rate for 2022 is 6%. According to the IRS, “you can take a credit against your FUTA tax for amounts you paid into state unemployment funds. The credit may be as much as 5.4% of FUTA taxable wages.” So, employers who pay into their state unemployment programs (known as SUTA or SUI) may only have to pay what’s equivalent to a .6% FUTA tax.
However, the federal government reduces that credit percentage in states that have an overdue balance on federal loans taken to meet their state unemployment benefits. The Department of Labor identifies a state as a “credit reduction state” after it has outstanding loan balances on January 1 for two consecutive years and fails to repay the full loan balances by November 10 of the second year. The 5.4% credit is reduced by .3% after the first year as a credit reduction state. Additional .3% reductions occur each year that follows if the state doesn’t repay its entire loan.
This essentially means that an employer in a credit reduction state will pay an amount closer to the full 6% FUTA tax rate than if they are in a state with no outstanding balance with the federal government.
Who and What is Exempt from FUTA?
Some compensation is not subject to FUTA. Below I’ve shared some of the exemptions. I encourage business owners to speak with their accountants or tax advisors about whether these or any other FUTA exemptions apply to them.
Self-employed individuals who pay themselves through owner draws or distributive shares of their partnership’s profits do not pay FUTA tax. Examples include:
- Owner of a Sole Proprietorship
- Owner of a single-member LLC taxed as a disregarded entity
- Partners in a General Partnership, a Limited Partnership, or a Limited Liability Partnership
- Members of a multi-member LLC taxed as a Partnership
In addition, the IRS grants a FUTA exemption to 501(c)(3) organizations if payments for services performed by an employee are subject to $100 or more in FICA (Social Security and Medicare) taxes.
IRS Form 940 declares certain types of payments exempt from FUTA tax:
- Fringe benefits (such as a company car)
- Group term life insurance
- Retirement and Pension
- Dependent Care
- Other (e.g., workers’ compensation payments)
Also, payments made to independent contractors who do work for a business are not subject to FUTA.
FUTA vs. FICA
It’s important to distinguish FUTA from FICA. Both are federal programs, but that’s where the similarity ends. As we’ve discussed, FUTA is paid by employers to help fund unemployment benefits for employees who lose their jobs through no fault of their own. After an employer has paid at least $1,500 to employees in any calendar quarter, they must pay the 6% FUTA tax on the first $7,000 paid to each employee during the year.
FICA (Federal Insurance Contributions Act) tax is paid by both employers and employees. The 15.3% FICA tax funds the Social Security and Medicare benefits programs. It is broken into 12.4% for Social Security FICA and 2.9% for Medicare FICA.
Employers pay half of the FICA tax (6.2% of the Social Security tax and 1.45% of Medicare tax) and the other half is withheld from employees’ compensation.
The maximum income subject to Social Security tax can vary from year to year, depending on the national average wage index. For example, the wage cap was $142,800 in 2021, $147,000 in 2022, and $160,200 in 2023. Fun fact: from 1937 to 1950, the FICA wage base limit was only $3,000!
Social Security tax provides income to:
- Individuals who have retired (who paid Social Security tax when they worked)
- Disabled persons
- Family members of workers who passed away
Medicare tax funds the federal hospital insurance program for individuals of age 65 or over and some younger people with disabilities. There is no Medicare tax wage base limit; all an individual’s wages (minus any exempt compensation, such as payments to a health savings account) are subject to the tax.
FUTA vs. SUTA
FUTA and SUTA (State Unemployment Tax Act) are both unemployment benefits programs. Both taxes fund unemployment insurance to ensure workers who lose their jobs (through a layoff or other reason not related to misconduct) receive payments as they seek other employment.
FUTA tax is paid by employers only. Likewise, in most states, SUTA is paid solely by employers. However, there are several states where a portion of SUTA tax is withheld from employees’ pay.
While the FUTA wage base is $7,000 of an individual’s wages, states’ caps on how much of an employee’s pay is subject to SUTA tax may be different. States’ SUTA reporting and deposit due dates may vary as well.
Get Organized to Get Peace of Mind
Business owners must report and pay their FUTA tax obligations on time if they want to avoid costly penalties and interest charges. As with other types of employment and payroll-related taxes and withholdings, businesses must have an EIN (a federal tax ID number) to report and pay FUTA tax. They must also have a reliable system in place for tracking and paying their tax liabilities. Tapping the right resources for insight is essential, too. Employers can gain peace of mind that they understand their FUTA responsibilities by learning more through the IRS website and consulting knowledgeable accounting and tax professionals for advice and information.
CorpNet Can Help
Hiring employees and need to get your ducks in a row? CorpNet can help you register for your state unemployment insurance and state income tax accounts.