What is FUTA?
The Federal Unemployment Tax Act – known as FUTA – is the system established by the federal government that determines how states conduct their unemployment benefit programs.
Who Pays FUTA, and How Much?
Any business with employees is responsible for paying FUTA. That’s right, even companies with just one employee need to pay this tax – so long as that employee was paid a minimum of $1,500 in wages per quarter, or worked with the company for 20 or more weeks of the year. While the maximum tax rate for FUTA is 6%, the effective rates are generally much lower. In fact, companies pay a maximum of $105 per employee, per year in FUTA taxes. This is due, in part, to the fact that FUTA is only paid on the first $7,000 of earnings per employee.
The actual amount paid will depend on if your current with your SUTA tax, and a few other variables. For example, some states are currently borrowing from the federal government to help cover their unemployment benefits. Employers in those states get less of a break on their FUTA tax than those in states that haven’t borrowed. Also, the type and number of employees you have will affect your rate. Companies with high numbers of temporary employees – who are paid close to minimum wage – tend to pay the highest percentages in FUTA tax. Click here to see a table that compares the taxes paid by a company with low wage, temporary employees and high paid full-time employees.
When and How is FUTA Paid?
FUTA taxes are calculated quarterly. They are due on the last day of the month – following that quarter (so taxes for January through March would be due April 30). However, if you owe less than $500 per quarter in FUTA, you can pay all your FUTA at once, at the end of the year. All FUTA taxes are paid through the Electronic Federal Tax Payment System (EFTPS). In addition, IRS Form 940 must be submitted by January 31 for the previous calendar year. This means that while most businesses calculate and submit their FUTA tax payments four times per year (they need to file the 940 form only once per year).
FUTA vs. SUTA
As you might expect, there is a matching state acronym (though its meaning is a bit different). SUTA stands for State Unemployment Tax Authority. Unfortunately, SUTA taxes are not as standardized as FUTA taxes. Each state has its own limit on taxable wages, with very few of them matching the federal limit of $7,000. Likewise, different states have different tax rates and rules for different types of companies. And, like the IRS, states also have their own forms or paperwork that must be filed. Generally speaking, the Department of Labor (or the equivalent entity on the state level) can help you determine how much SUTA you owe, when and how it must be paid, and what paperwork needs to be filed. In order to get help with paying SUTA, you’ll want to find the contact information for your state’s labor agency at the following URL: http://www.workforcesecurity.doleta.gov/unemploy/agencies.asp
FUTA and SUTA are only two of the many expenses that come with hiring new employees. The article, “The Hidden Expenses of Hiring Employees”, describes a wide range of costs beyond salary including workers compensation insurance, employment law posters, and FICA taxes.