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What is FUTA Tax?
Understanding Federal Unemployment Tax Act
Charles Hardy | Last Updated: March 10, 2025
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In the U.S., layoffs in any industry or business organization are common. Major reasons for such layoffs are overhiring, inflation, high interest rates, etc. To help those unemployees, the Federal government has introduced the FUTA taxes. Unemployed workers receive payments from the FUTA when they lose their jobs. Employers must take complete responsibility for FUTA taxes.
Let's read more to know about the ins and outs of
FUTA taxes.
Key Takeways:
- One of the main federal payroll tax forms for employers is FUTA(Federal Unemployment Tax Act).
- FUTA tax is used to help the unemployed who lost their job without any fault on them.
- FUTA tax rate is 6% on the first $7000 paid to each employee.
- Employers who pay SUTA can claim a credit of 5.4%, which results in a 0.6% FUTA tax rate.
- FUTA taxes are paid quarterly and reported annually using Form 940(Employer's annual Federal unemployment tax return).
What is FUTA tax?
FUTA refers to the Federal Unemployment Tax Act(FUTA). It is one of the federal laws that charges payroll taxes for employers. FUTA tax is used to help unemployed workers or during high regression. According to the IRS, the FUTA tax rate is 6% and applies to the first $7000 paid to each employee annually. Employers tend to pay the taxes to the federal government.
What do you mean by UI(Unemployment Insurance)?
Unemployment Insurance(UI) is a government(State-federal) benefit set up to help out workers who have lost their jobs for no apparent fault on them (e.g. Layoffs). During such a critical period, Unemployment Insurance can be accessed for a limited period to search for another job.
Note:
- Employees who quit voluntarily from their jobs are not eligible to claim the UI.
- Employees who were fired due to underperformance or absenteeism are not eligible for UI.
Conditions for paying FUTA taxes
FUTA tax must be reported annually but paid for every quarter. Here are some conditions for paying FUTA taxes:
- FUTA tax of more than $500, must be paid for each quarter.
-
FUTA tax of less than $500, must be carried to the next quarter until it reaches cumulative
tax liability. - FUTA tax deposits can be made through the Electronic Federal Tax Payment System (EFTPS).
How much is the FUTA tax rate?
- Employers must pay FUTA tax if they pay $1500 or more to their employees.
- The FUTA (Federal Unemployment Tax Act) tax rate is 6% on the first $7000 of an employee's wages.
-
If the employers pay SUTA taxes then it can lower to 0.6% and the employer can earn a credit
up to 5.4%. - On failing to pay the tax the credit of 0.3% gets reduced (5.4% - 0.3% = 5.1%). It doubles until it is paid properly.
How to Calculate FUTA Tax Liability
FUTA calculation is a straightforward approach. Consider the scenarios to calculate the FUTA tax
-
Scenario 1:
Assume that 10 employees working in an organization earn more than $10,000 but only $7000 are subject to FUTA. The FUTA tax rate is 6% for the states that are exempt from credit reduction state.
FUTA tax liability = No.of employees * (Employee’s eligible wages * FUTA tax rate).
FUTA tax liability = 10 * (0.6 % $7000) = 10 * $42 = $420.
Note: FUTA tax liability varied based on the employee's wages. It is well known that employees in companies earn different wages based on their roles.
-
Scenario 2:
Assume there are 3 employees working in the organization and earn $10,000, $6000, and $4000 respectively. Calculate the FUTA tax.
FUTA tax liability = $7000 + $6000 + $5000 * 0.6%
The total FUTA tax liability of the employees in the organization is ($42 + $36 + $30) = $108.
Who pays FUTA taxes?
Employers are required to pay FUTA taxes. Employers of different sectors may have different requirements for paying FUTA tax. FUTA taxes are not deducted from the employee's wages. Employers must take care of FUTA tax. Here are some reporting requirements for various types of employees.
-
Business - Employers must transmit to FUTA if they pay $1500 or more to the employees or had more than one employee for some part of the day across any 20 different weeks of
the year. - Household employers - Employers must pay FUTA if the household employees get paid more than $1000. Employers of the household employees(College, private home, etc)are responsible for paying FUTA taxes.
- Agricultural employers - Agricultural employers who paid $20,000 or more to their employers are eligible for FUTA taxes. Employers had more than ten employees for some part of the day across any 20 different weeks of the year.
How do you Report FUTA taxes to the IRS?
- Form 940 (Employer's annual federal unemployment tax return) is used to report the FUTA taxes. It is an annual form and it should be reported on January 31 of every year. It can be mailed or electronically filed.
- Employers of Farmworkers are exempt from reporting Form 940. Instead, they can use Form 943(Employer's annual federal unemployment tax return for agricultural employees) to report FUTA.
Difference between FUTA and SUTA
| FUTA | SUTA |
|---|---|
| FUTA refers to (the Federal Unemployment Tax Act) |
SUTA refers to (State Unemployment Tax Act) |
| FUTA contribution is completely done by the employer and deposited to the federal government. | SUTA contribution is also done by the employer and deposited to the State government. |
| FUTA tax rate is 6% on the first $7000 of the employee's wages | SUTA tax rate varies for different states. |
| Employers need Form 940 to report to the IRS and Form 941 to pay taxes for every quarter. | Employer must comply with the states unemployment to report or file the SUTA taxes. |
Frequently Asked Questions
FUTA taxes are paid quarterly and reported annually to the IRS. If the Futa tax liability is less than $500 then it can be carried to next quarter. if the FUTA tax liability is more than $500 then it is mandatory to pay for each quarter. The deadline to pay FUTA tax for each quarter are:
| QUARTER | MONTHS | DUE DATE |
|---|---|---|
| Quarter 1 | Jan, Feb, Mar | April 30th |
| Quarter 2 | Apr, May, June | July 31st |
| Quarter 3 | July, Aug, Sept | October 31st |
| Quarter 4 | Oct, Nov, Dec | January 31st (following year) |
FUTA taxes that are paid must be reported annually using the IRS Form 940 by January 31st of each year for the previous calendar.
A state is a Credit Reduction State when the state borrows an amount from the federal government and fails to repay the borrowed amount within a given period(two years). Then, the state becomes a credit-reduction state until it repays the borrowed money. FUTA credit reduction rate is 0.3% (i.e., 5.4% - 0.3% = 5.1%) increased every year until you repay it.
Most of the employers must pay FUTA taxes. However, some are exempt from FUTA taxes in certain circumstances
- Employees who earn less than $1500.
- Household employees who earn less than $1000.
- Farmworkers who earn less than $20,000 are exempt from paying FUTA.
- Self-employed(Independent contractors, freelancers, etc).
- Non-profits 501 (c)(3) organizations.
Several non-profit organizations are exempt from FUTA tax while others must pay FUTA. Non-profit organizations that are designated as 501(c)(3) are exempt from FUTA taxes. Some of the Non profit organization that are exempt from paying FUTA are
- Religious organizations
- Educational Organizations
- Health care organizations
Several non-profit organizations are exempt from FUTA tax while others must pay FUTA. Non-profit organizations that are designated as 501(c)(3) are exempt from FUTA taxes. Some of the Non profit organization that are exempt from paying FUTA are
| FUTA | FICA |
|---|---|
| FUTA refers to (the Federal Unemployment Tax Act) | FICA refers to (Federal Insurance Contribution Act) |
| It is unemployment benefits. | It is a Social Security and Medicare benefit for employees. |
|
FUTA contribution is completely done by the employer. |
FICA contribution is the equal share by both employee and employer |
| FUTA tax rate is 6% on the first $7000 of the employee's wages |
The FICA tax rate for social security(6.2%) and the Medicare tax rate is (1.45%). Total FICA tax rate is 15.3%. |
| Employers need Form 940 to report to the IRS and Form 941 to pay taxes for every quarter. | FICA taxes are reported using Form W2. |
| It must be reported for every quarter | It must be reported annually (i.e. Jan 31st of every year) |
