Learn more about the Federal Unemployment Tax Act (FUTA) and what you have to do to be compliant.
Withholding taxes from your employees’ wages is only part of your payroll tax obligations. You must also pay your own share of payroll taxes — including FUTA.
What does FUTA stand for?
FUTA stands for “Federal Unemployment Tax Act.”
Enacted in 1938, this is a federal law that authorizes the Internal Revenue Service (IRS) to collect a federal tax from employers to help fund state workforce agencies. The IRS oversees the collection, administration, and enforcement of FUTA tax — which is imposed on employers (not employees).
What are FUTA funds used for?
The tax collected for federal unemployment is used to fund state workforce agencies, which are responsible for collecting, administering, and enforcing state unemployment tax. The State Unemployment Tax Act (SUTA) authorizes the state unemployment tax. Depending on the state, either the employer alone or both the employer and the employee pay SUTA tax, which provides unemployment benefits to eligible workers in the state.
FUTA payments help the state agencies that collect, administer, and enforce state unemployment tax.
Although FUTA does not directly pay unemployment benefits to eligible workers, it helps to fund the state workforce agencies that make those payments. According to a report from the Congressional Research Service, the tax act “pays for state administrative costs, half the cost of Extended Benefits (EB), and loans to insolvent state UC programs.”
Who is subject to FUTA?
Most employers must pay FUTA tax. That said, the IRS has the following 3 tests for determining which employers must pay FUTA tax: general test, household test, and agricultural test.
Under the general test, you must pay FUTA if you:
- Paid a total of $1,500 or more to your employees during any quarter of the previous or current year, or
- You have at least 1 employee who works at least 20 weeks in the previous or current year
For the household and agricultural employers tests, see IRS Publication 15 (Circular E), Employer’s Tax Guide.
What is the FUTA rate?
Under FUTA, employers pay taxes on up to the first $7,000 paid to each employee. This amount is known as the “taxable wage base.”
The tax rate is 6%. But if you paid your state unemployment taxes (SUTA) on time, you can take a maximum credit of 5.4% against your FUTA tax rate, which brings your FUTA rate down to 0.6%.
With the maximum credit, you pay only $42 per year in FUTA for each employee who earns at least $7,000 annually ($7,000 x .006 = $42).
Paying SUTA taxes late
However, if you pay your SUTA taxes late, then your FUTA credit will have a limit of 90% of the maximum 5.4% credit, instead of the full amount. Moreover, if a state fails to repay the money it borrowed from the federal government to pay unemployment benefits, then that state is called a “credit reduction state.”
The FUTA taxable wage base and tax rate haven’t changed since 1983.
If you’re in a credit reduction state, you will receive a reduced credit against your FUTA tax, instead of the maximum 5.4% credit. The Department of Labor’s website contains a list of historical and potential FUTA credit reduction states.
Although the FUTA taxable wage base and tax rate have remained unchanged since 1983, it’s important to check Publication 15 annually for any new developments.
How and when to report FUTA
Generally, employers must report their annual FUTA tax liability to the IRS on Form 940 by January 31. For example, file your Form 940 for your 2022 FUTA taxes by January 31, 2023.
Note that if you paid all of your federal unemployment taxes on time, the IRS allows you to file your Form 940 by February 10.
Additionally, if the deadline for filing Form 940 falls on a non-business day (as defined by the IRS), you can file the next business day.
What are the FUTA deposit requirements?
You must use the Electronic Federal Tax Payment System (EFTPS) when making federal employment tax payments to the IRS, including FUTA payments. If your tax liability is:
- $500 or more for the quarter, deposit your payment by the last day of the month that follows the end of the quarter. For example, for the quarter ending March 31, deposit your FUTA taxes by April 30.
- $500 or less for the quarter, you can carry the amount forward until you accumulate more than $500, at which point, you must make a deposit for that quarter.
- $500 or less for the year, you can either make a deposit payment or pay the amount due when you file your Form 940 by January 31.
If your deposits are due on a non-business day, you can make the payment on the next business day.
Failure to adhere to these rules can result in penalties from the IRS. See “Payroll Tax Penalties Small Businesses Should Know About” for details.
You can minimize federal unemployment tax errors and penalties by automating your payroll tax processes through a platform like Zenefits Payroll.