Federal Unemployment Tax Rate: Everything You Need to Know
FUTA is the Federal Unemployment Tax Act, which is the law requiring employers to pay toward unemployment agencies run by each state for unemployment employees.4 min read
Federal Unemployment Tax Rate
The Federal Unemployment Tax Rate is rate implemented by a United States federal law that imposes a federal employer paid tax to fund state agencies fund unemployment payments to workers who have lost their job.
What is FUTA?
FUTA is the Federal Unemployment Tax Act, which is the law requiring employers to pay toward unemployment agencies run by each state. FUTA is the tax that provides unemployment compensation payments to employees who are not working (due to losing their job, being laid off, etc.). Employees do not pay toward the Federal Unemployment Tax, unlike how state and federal income taxes are handled.
How Much FUTA Tax Do I Have to Pay?
Employers must pay both Federal Unemployment (FUTA) and State Unemployment (SUTA). The IRS allows you to take a credit from the State Unemployment taxes you pay to the department of revenue for your state. So, you must first calculate the SUTA taxes before calculating the FUTA taxes that are owed to the IRS.
FUTA taxes are applied to the first $7,000 of gross compensation paid to each employee each year. If the employee makes over $7,000, there are no FUTA taxes applied on the amount over $7,000.
In 2017, the FUTA rate is 6.0 percent. Employers can get a credit toward the 6.0 percent rate of up to 5.4 percent, which decreases the FUTA rate to 0.6 percent.
If your company pays the SUTA on time and prior to when FUTA taxes are due, the amount the employer must pay toward the FUTA is reduced to 0.6 percent. Your company gets the full 5.4 percent credit, even if your state’s rate is less than 5.4 percent. In addition, the state must be in good standings with the federal government.
The FUTA rate is always the same for all states, regardless of what each state’s rate it.
When the FUTA Credit May Not Apply
There are occasions when the FUTA credit doesn’t apply, such as if wages subject to FUTA tax are not subject to SUTA. In certain states, some wages don’t count toward SUTA, but they do count toward FUTA, such as certain sick pay by unions, some fringe benefits, and wages paid to corporate officers.
When Do You File Form 940 with the IRS?
The IRS form that companies must file annually to report payments made for unemployment taxes is called Form 940. When the Form 940 is submitted, any FUTA taxes that are owed must also be submitted. The Form 940 is due January 31, for the prior tax year.
Who Has to Pay FUTA Tax?
All employers who with one or more employees who they paid wages in a calendar year of over $1,500 total, must pay FUTA taxes. Family members are sometimes exempt from paying FUTA taxes, so check in to whether or not you have to pay if you have children, parents, or spouses that work for your business.
What are FUTA Funds Used For?
FUTA and SUTA funds are used to provide unemployment compensation to workers who have lost their jobs.
When to Pay FUTA Tax?
You will want to review IRS Publication 15, Page 29 to know when to pay FUTA taxes, and to verify you meet the criteria and must pay FUTA taxes.
State Unemployment Tax Rates
SUTA is the State Unemployment Tax Act, which is the law requiring employers to pay toward unemployment agencies in each state. The majority of the unemployment taxes paid by an employer go directly to the state fund, with a smaller amount going to the federal fund. Each state determines their own unemployment tax rates that employers must pay. You can find your state’s rate in IRS Publication 926.
When are FUTA Taxes Due?
The deadline for when FUTA taxes must be paid can vary. The deadline is based on the quarterly tax liability of your company. FUTA taxes must typically be paid by the last day of the month following the end of a calendar quarter: Jan. 31, April 30, July 31, and Oct. 31.
Some exceptions to the general guidelines above are:
- There are different rules for some small-business owners
- If the FUTA tax liability is $500 or less for the quarter, the taxes do not need to be paid until they are over $500 or the next quarter once you exceed $500.
To qualify for the FUTA tax credit for payment of the SUTA taxes, you must submit your SUTA tax by the state’s deadline and before the FUTA taxes are due.
If you need additional information on the Federal Unemployment Tax Rate, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of Google, Strip, and Twilio.