The Federal Unemployment Tax Act (FUTA) is a federal payroll tax that helps fund unemployment benefits.
In response to the COVID-19 economic crisis, most states took action in mid to late 2020 and early 2021 to minimize some of the financial concerns (i.e., increases in SUI tax expenditures) that might affect companies in the calendar year 2021. As a result, most states reduced the taxable wage base last year.
In this article, we will talk about FUTA, its current tax rate and how much you need to pay for FUTA.
What is Federal Unemployment Tax Act?
The Federal Unemployment Tax Act (FUTA), created in June 1939, was designed to create more jobs for Americans who were suffering during the Great Depression. It is a federal payroll tax that provides temporary unemployment benefits to qualified workers who lose their job through no fault of their own.
The FUTA rate was initially 3% on both employers and employees for each covered worker from 1940 until 1950, when it changed to 0.20% per employee. In 2013, the rates dropped substantially due to economic improvements leading up to 2014.
2022 FUTA tax rate
The standard FUTA rate in 2022 is 6%, with a taxable wage base of $7,000 (per employee) or taxable wages up to $7,000.
This means that an employer’s federal unemployment payroll tax liability is equal to 0.6 % on the first $7,000 paid per worker; however, state unemployment taxes are due as well.
You can pay extras to employees in addition to their income or earnings, such as the cost of meals or housing, some relocation charges, health plans, group life insurance benefits, or 401ks. The Instructions for Form 940 include a detailed list of these “fringe” advantages.
Take note that a person that is part of your workforce is considered as an employee if they are engaged in service to you, and it’s for your business (or trade), whether it’s full or part-time. These are employees that you filed Form W-2 for.
How to calculate Federal Unemployment Tax Act
To compute the FUTA tax on a worker’s annual wages, do the following:
Add up all taxable wages paid to an employee in a calendar year. For example, you pay Employee Jane $7,000 in December 2021 and another $8,500 in January 2022. Add these two amounts together for a total of $15,500.
If during that same period you paid Employee John only $5,000 of wages subject to FUTA taxes, then your total is still $15,500. Multiply the amount by 0.07. In this case, your answer would be $120.00 ($15,500 x 0.07 = 930).
Paying FUTA taxes to the IRS
Typically, employers must deposit their FUTA tax liability to the U.S. Treasury through the Electronic Federal Tax Payment System (EFTPS) or by filling out and mailing in a paper form (Form 940-V).
The business also needs to report FUTA by filing a Form 940 (or 940-EZ) by January 31 of the following year as part of its annual tax returns.
Who needs to pay for FUTA?
Every employer pays FUTA; nothing is taken from the employee’s pay. However, there are a few more standards to complete in order to be considered.
You must pay if:
- You pay wages of $1,500 or more (in any calendar quarter) to an employee;
- You have one or more employees working for you on any day in 20 different calendar weeks;
- Or, your employees are scattered over one state within a single calendar year.
Contract workers—those who receive a Form 1099-NEC—are not considered “employees.”
What is the FUTA tax credit?
A credit of up to 5.4 percent for state unemployment taxes can reduce the FUTA tax owed by employers on their payroll, but only if you are subject to state or local unemployment taxes.
Setting aside Federal Unemployment Tax Act money
To keep track of your FUTA savings, follow these tips:
- Know your quarterly average gross payroll (AGP). Add the total gross wages for all employees in any quarter and divide by 4.
- Calculate the FUTA you owe based on your AGP. Multiply your AGP by 0.7%
- Add this amount to the tax you pay for other employment taxes (state and local unemployment insurance, state workers’ compensation insurance, etc.)
- Deposit or pay any federal non-FUTA taxes as well as FUTA taxes by the deposit schedule or due dates so that you meet all filing requirements.
- Keep records of these calculations to ensure that no interest is charged to you for underpayment of estimated tax because you deposited too little money during the year.
Filing and paying FUTA taxes is a straightforward process, as long as you have a basic understanding of how much you owe and when the payments are due.
Failure to pay FUTA taxes can lead to significant penalties, including fines and even criminal charges. So it’s in your best interest to make sure you’re fulfilling your FUTA requirements and other tax responsibilities on time.
If you need to know more details about FUTA rates, the federal unemployment tax act or how to do your payroll taxes properly, the best way is either reading-related guides online. And if you are not good at that kind of stuff but want to get it done on time, then hiring a professional is probably your best choice.