What is FUTA Tax? Federal Unemployment Tax Explained
February 23, 2023
Federal unemployment taxes and credits can be tricky depending on where your business is located. Here are the most important details you need to know.
What is FUTA Tax?
The Federal Unemployment Tax Act (FUTA) establishes a federal payroll tax for American businesses and organizations that helps fund programs and benefits for unemployed citizens.
FUTA was created in 1939 as a response to the events of the Great Depression and today assists similar, state-based programs often funded by State Unemployment Tax Acts (SUTAs).
Unlike Social Security and Medicare taxes, FUTA taxes are paid solely by employers. Employees do not share the responsibility of paying this tax, but FUTA tax (like other payroll taxes) is calculated and paid each time an organization processes a payroll.
Key Takeaways
- One of the main federal payroll taxes for American employers, along with Social Security and Medicare taxes.
- Unlike Medicare and Social Security, only employers are responsible for paying FUTA taxes.
- Created after the events of the Great Depression to help fund unemployment programs and benefits for U.S. citizens
Who Pays FUTA Tax?
Per the Internal Revenue Service (IRS), a business must pay unemployment taxes if it meets the criteria of any of the following three tests:
- General Test – Businesses that paid $1,500 or more in wages to any employee in any quarter of the year or had one or more employees for at least some part of a day across any 20 different weeks of the year
- Household Employee Test – Businesses or individuals that paid $1,000 or more in cash to household workers (employees who performed household work in a private home, local college club, or local fraternity or sorority chapter) in any quarter of the year
- Farmworker Test – Businesses that paid $20,000 or more in cash to farmworkers in any quarter of the year or employed 10 or more farmworkers at least some part of a day across any 20 different weeks of the year
The only organizations that are exempt from paying FUTA taxes are those with a 501(c)(3) status. This is still the case even if such an organization is subject to Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA).
2023 FUTA Tax Rate
The 2023 FUTA tax rate is 6% of the first $7,000 from each employee's annual wages. Therefore, employers shouldn't pay more than $420 annually for each employee (6.0% x $7,000).
For example, if Employer XYZ pays one employee $15,000 annually and the other $5,000 annually, it would pay a total of $720 in unemployment taxes as only one employee earns over $7,000 a year. Because the other employee earns only $5,000 annually, Employer XYZ would only pay 6.0% of that $5,000.
|
Employee |
Current FUTA Tax Rate |
Total Unemployment Taxes Owed |
|---|---|---|
|
Employee A |
0.06 x $7,000 = $420 |
$420 + $300 = $720 |
|
Employee B |
0.06 x $5,000 = $300 |
|
Employee |
Current FUTA Tax Rate |
Total Unemployment Taxes Owed |
|---|---|---|
|
Employee A |
0.06 x $7,000 = $420 |
$420 + $300 = $720 |
|
Employee B |
0.06 x $5,000 = $300 |
How to Pay FUTA Taxes
Organizations with a Federal Employer Identification Number (FEIN) can make a FUTA tax payment in the form of an Electronic Fund Transfer (EFT) to the Department of Treasury's Electronic Federal Tax Payment System (EFTPS).
FUTA taxes are usually due one month after the end of a quarter, but if an organization only collected $500 or less in FUTA taxes for a quarter, it could wait until the following quarter to deposit the funds. Note, if any of the following deadline dates fall on a weekend or holiday, the deposit may be made on the next business day:
|
Quarter |
Quarter End Date |
Deposit Due Date |
|---|---|---|
|
Q1 (Jan, Feb, March) |
March 31 |
April 30 |
|
Q2 (Apr, May, June) |
June 30 |
July 31 |
|
Q3 (July, Aug, Sept) |
September 30 |
October 31 |
|
Q4 (Oct, Nov, Dec) |
December 31 |
January 31 |
|
Quarter |
Quarter End Date |
Deposit Due Date |
|---|---|---|
|
Q1 (Jan, Feb, March) |
March 31 |
April 30 |
|
Q2 (Apr, May, June) |
June 30 |
July 31 |
|
Q3 (July, Aug, Sept) |
September 30 |
October 31 |
|
Q4 (Oct, Nov, Dec) |
December 31 |
January 31 |
Filing Form 940
Form 940 is the tax return form used to report and file an organization's unemployment taxes. Although organizations make FUTA tax payments on a quarterly basis, this form only needs to be filed annually on January 31. Organizations can choose to file this form in print, but the IRS prefers the forms to be filed electronically.
Penalties
Organizations must abide by these deadlines and filing requirements, or they will face late penalties. The IRS outlines the difference between penalties for late filings and late payments, but organizations can face both simultaneously if they're not careful. For the most part, an organization's penalties will depend on the amount of tax due and how late the filing and/or payment are.
FUTA Tax Credits
Unemployment taxes don't exist at just the federal level under FUTA. Each state also has a separate unemployment tax it applies under a State Unemployment Tax Act (SUTA). Similar to FUTA, most state unemployment taxes are paid solely by employers, though some states (Alaska, New Jersey, and Pennsylvania) do require employees to share this responsibility.
The positive news is that if an organization pays its state unemployment taxes in full and on time, it can earn up to a 5.4% credit for its FUTA unemployment taxes. In such cases, employers only need to use 0.6% when calculating their FUTA tax payments.
For example, if Employer XYZ above earned the full 5.4% FUTA credit, it would only have to pay up to $42 in FUTA taxes per employee (0.6% x $7,000).
Credit Reduction States
Unfortunately, the total credit available to an organization depends on the state in which it operates and if that state has any outstanding unemployment insurance loans due to the federal government.
If a state has such a loan on January 1 for two consecutive years and does not repay the full amount by November 10 of the second year, the total credit allowed in that state will be reduced by 0.3% each year until the loan is repaid. These states are called Credit Reduction States, and as of November 10, 2022, only four states (California, Connecticut, Illinois, and New York) have this status.
So, if Employer XYZ is located in Illinois, then the total FUTA credit it could earn for its 2022 taxes would be 5.1% and it would have to pay up to $63 in FUTA taxes per employee (0.9% x $7,000). If the state still has not fully repaid the loan by November 10, 2023, the maximum credit will be reduced again to 4.8% and Employer XYZ would have to pay up to $84 in FUTA taxes per employee for 2023 (1.2% x $7,000).
FUTA FAQs
What is the difference between FUTA, SUTA, and FICA?
FUTA taxes are federal unemployment taxes, while SUTA taxes are unemployment taxes paid to the state. These differ from FICA taxes, which are federal payroll taxes for Medicare and Social Security.
Who is subject to FUTA?
Any organization that meets the General, Household Employee, or Farmworker tests must pay FUTA taxes.
How do I find my FUTA taxes?
Multiply the current FUTA tax rate (6%) by the current wage base limit ($7,000) for each worker you employ that earns over $7,000 annually. If an employee earns less than $7,000 annually, multiply the current tax rate by her or his total annual wages.
What's a Credit Reduction State?
If a state has an unpaid unemployment insurance loan due to the federal government on January 1 for two consecutive years and hasn't repaid the loan by November 10 of the second year, it becomes a Credit Reduction State. The maximum FUTA tax credit available to employers in that state is reduced by 0.3% each year until the loan is fully repaid.
What's exempt from FUTA?
The only organizations exempt from FUTA taxes are those with a 501(c)(3) status (aka charity organizations). However, these organizations may still be subject to FICA taxes. Also, in certain U.S. territories, the specific wages paid to workers can sometimes be exempt from FUTA taxes even if the overall organization is not.
Do nonprofit organizations pay FUTA?
If the nonprofit qualifies for 501(c)(3) status, then it does not have to pay FUTA taxes.
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