What is FUTA tax? Understanding the Federal Unemployment Tax Act

What Is FUTA tax

When it comes to payroll taxes, businesses and employers must navigate a complex landscape of federal and state regulations. One tax that plays a significant role in the United States is the Federal Unemployment Tax Act (FUTA). We’ll dive into the details of FUTA, exploring what it is, how it works, and its implications for employers and employees alike, and quickly, because you’re probably here because payroll will be due soon and you have questions.

What is FUTA?

The Federal Unemployment Tax Act (FUTA) is a federal law that imposes a tax on employers to fund unemployment benefits at the federal level. The tax revenue collected under FUTA is used to provide temporary financial assistance to workers who have lost their jobs. Administered by the Internal Revenue Service (IRS), FUTA aims to offer a safety net for individuals facing unemployment while supporting state unemployment insurance programs.

Who pays FUTA?

The responsibility for paying FUTA tax falls on the employer. The tax is separate from other payroll taxes, such as Social Security and Medicare. Employers are required to pay FUTA tax based on the wages paid to their employees. This should answer any employee question; now back to the employer.

How does FUTA work?

The Federal Unemployment Tax Act (FUTA) is a federal law that requires employers to pay unemployment taxes to help fund state unemployment insurance programs. The tax is 6.0% of the first $7,000 of wages paid to each employee, with an annual maximum of $420 per year. However, employers can claim a credit of up to 5.4% for state unemployment taxes paid, which reduces the effective FUTA tax rate to 0.6%.

The funds collected from FUTA are deposited into the Federal Unemployment Trust Fund, which is maintained by the U.S. Treasury. These funds are then used to support the administration of unemployment insurance programs in the states, including providing benefits to eligible individuals.

Employer Responsibilities Under FUTA:

  1. Filing Form 940: Employers subject to FUTA must file Form 940, also known as the Employer’s Annual Federal Unemployment (FUTA) Tax Return, with the IRS on an annual basis. This form reports the wages paid to employees, the amount of FUTA tax owed, and any applicable credits.
  2. Paying FUTA tax: Employers are responsible for paying FUTA tax on a quarterly basis, along with their other payroll tax obligations. Failure to pay the tax or file the required forms in a timely manner can result in penalties and interest.
  3. Understanding state-specific requirements: While FUTA is a federal tax, employers must also comply with state unemployment tax laws, which may have additional requirements and rates.

Regarding the Payment of FUTA Tax

FUTA tax payments are typically made on a quarterly basis. Employers are required to deposit FUTA tax on a regular schedule, following the guidelines set by the Internal Revenue Service (IRS). The specific deadlines for FUTA tax payments are as follows:

  1. Quarter 1: January 1 to March 31
    • Deadline: April 30
  2. Quarter 2: April 1 to June 30
    • Deadline: July 31
  3. Quarter 3: July 1 to September 30
    • Deadline: October 31
  4. Quarter 4: October 1 to December 31
    • Deadline: January 31 (of the following year)

It’s important to note that if the payment due date falls on a weekend or a federal holiday, the deadline is typically extended to the next business day. If you have a good Payroll software provider, they will notify you of any holiday exceptions to deadlines. Employers can use the Electronic Federal Tax Payment System (EFTPS) to make their FUTA tax payments electronically or can opt to pay by mail using the appropriate IRS forms. Your payroll software should also handle electronic submission, and Form 940 filing.

Employers should file IRS Form 940, the Employer’s Annual Federal Unemployment (FUTA) Tax Return, by January 31 of the following year. This form reports the wages paid to employees, calculates the FUTA owed, and determines any applicable credits.

Benefits of FUTA

FUTA plays a vital role in safeguarding the welfare of workers who find themselves unemployed due to circumstances beyond their control. Providing temporary financial assistance helps individuals bridge the gap between jobs, ensuring basic needs are met and reducing the impact of unemployment on individuals and their families. Moreover, FUTA helps stabilize the economy by supporting consumer spending during periods of economic downturns.

Do your employees have questions about FUTA in their pay statements? Send them to the IRS Tax Withholding Estimator. You as the employer can use it too:

IRS Tax Withholding Estimator

In Summary

The FUTA is a federal law that imposes a tax on employers to fund unemployment benefits at the federal level. By understanding FUTA and its implications, employers can fulfill their tax obligations, contribute to the welfare of workers, and ensure compliance with federal and state laws. While navigating the intricacies of payroll taxes can suck, staying informed about FUTA keeps this specific aspect of payroll operations running smoothly.

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Cody Bess