What You Should Know About FUTA When Filing Your Taxes
FUTA stands for the Federal Unemployment Tax Act. As an employer, you’re required to pay this tax if you meet certain criteria, such as paying at least $1,500 in employee wages in a quarter. If you’ve never paid FUTA taxes before, you may be unaware of what this process entails. Don’t worry, we’re here to help.
This guide takes you through the most important facts about FUTA taxes, so that you can better identify what your tax liability is. Topics include the due date for FUTA taxes, the main differences with SUTA, how FUTA is paid, and the current tax rate. By the end of this post, you should know whether you owe FUTA taxes and how to calculate them. Additionally, you should know what form to use to file your taxes and when to submit it.
So, let’s dive in.
What does FUTA entail?
First of all, FUTA is a standard tax that most employers are required to pay directly to the federal government. This tax is part of a program that assists states in paying unemployment benefits for terminated employees. The Department of Labor pays out these benefits to those who qualify.
If you currently pay employee wages that amount to $1,500 or higher, you’re required to pay this tax on an annual basis. Keep in mind that your state unemployment insurance (SUI) must still be paid alongside FUTA taxes. The same is true for Social Security taxes.
Next, it’s important to understand that FUTA taxes aren’t paid by employees and can’t be taken out of their paychecks. While employers pay these taxes, they are only assessed on the initial $7,000 of the wages that an employee receives. This wage threshold has remained the same since 1983, though it could be altered by Congress in the future.
Finally, if you are self-employed, the FUTA tax doesn’t apply to you. The same is true if you operate as a partner. When your business hires independent contractors, they don’t factor into your FUTA taxes, either.
When does FUTA tax need to be paid?
To see if you will need to make FUTA tax payments, you can take three tests. These tests depend on the types of employees you hire.
First, you can take a general test. With this test, FUTA taxes must be paid if you meet at least one of two basic criteria:
- you paid $1,500 or more in employee wages during a calendar quarter, or
- you paid at least one employee for a portion of a day in at least 20 weeks throughout a calendar year.
If either of the above applies to you, you must pay FUTA taxes.
Second, you can take a household employees test. If you hire someone as a gardener, babysitter, or maid to complete work in or around your home, a FUTA tax will be assessed when you pay wages of $1,000 or more during a calendar quarter.
Third, you can take a farmworker test. If at least 10 or more farmworkers are employed for some of the day during at least 20 weeks of the year, you must pay FUTA taxes. This applies to temporary employees, part-time employees, and full-time employees. These taxes also apply if you pay $20,000 or more in cash wages during a quarter.
Differences Between FUTA and SUTA
When the government created the Federal Unemployment Tax Act, it also created the State Unemployment Tax Act (SUTA). If you happen to pay into the state unemployment insurance (SUI) fund, you could receive a FUTA tax credit that lowers the tax rate that you pay each year in FUTA taxes. However, if you want to receive the full credit, you must meet several criteria, such as:
- You must pay state unemployment taxes for all of the wages that are assessed when calculating the FUTA tax.
- You must pay state unemployment taxes on time and in full.
- If you live in what’s known as a credit reduction state, you can’t pay directly into a state fund.
When a state is referred to as a credit reduction state, it means they received federal government loans to help meet state unemployment benefit liabilities and have yet to repay the loans. At the moment, however, no states qualify as credit reduction states. When you want to pay your SUTA taxes, keep in mind that these taxes are calculated and paid differently with each state. The tax rates for SUTA taxes can range anywhere from 0% to upward of 18.5%.
How FUTA is Paid and Reported
When calculating and reporting your FUTA taxes, you must fill out Form 940. You enter taxable FUTA wages for each employee on this form. These wages are then multiplied by the lowest FUTA tax rate. In the majority of states, the amount of wages that must be calculated with the FUTA tax are the same as with the SUTA tax.
Once you have multiplied the taxable wages by the lowest FUTA tax rate, you might then be required to multiply this number by the remaining FUTA tax rate, which could be as high as 5.4%. This occurs if you didn’t pay your SUTA taxes on time or in full. On the other hand, you can lessen your tax liability for the year if you happened to overpay in FUTA taxes during the previous year.
The Current FUTA Tax Rate
The size of a business doesn’t matter with the FUTA tax, which means that even small business owners must pay these taxes if they meet the criteria. Once you fill out Form 940, you must submit the form by January 31. However, employers are required to file taxes on a quarterly basis if their tax liability is higher than $500 per quarter.
As of the time of this post, the FUTA tax rate is 6%, which means that employers need to withhold 6% of the initial $7,000 in employee wages. A credit reduction can lower the FUTA tax rate by 5.4%, which means that your liability could be only 0.6%. This credit is only applied if you paid your SUTA. Keep in mind, you must pay your FUTA taxes at the same time you pay your Social Security taxes.
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