Federal Unemployment Tax Act (FUTA)

What Is the FUTA Tax Rate?

The Federal Unemployment Tax Act (FUTA) is a payroll tax paid by employers to help fund state workforce agencies and federal unemployment benefits. The FUTA tax rate is set by federal law and differs slightly depending on the state’s compliance with federal guidelines.

The standard FUTA tax rate is 6.0% on the first $7,000 of each employee’s annual earnings. However, employers who pay their state unemployment taxes in full and on time typically receive a credit of up to 5.4%, effectively reducing their FUTA tax rate to 0.6%. Thus, on the first $7,000 of each employee’s earnings, the maximum tax an employer would typically pay is $42 per employee per year.

How Is FUTA Tax Calculated?

The Federal Unemployment Tax Act (FUTA) tax is a payroll tax that helps fund unemployment benefits. As an employer, here is a breakdown of how the FUTA tax is calculated:

  • Identify taxable wages: The FUTA tax applies only to the first $7,000 of wages paid to each employee in a calendar year. Any wages above this threshold are not subject to FUTA tax.
  • Apply the tax rate: The base FUTA tax rate is 6.0%. Multiply this rate by the taxable wages for each employee (capped at $7,000).
  • Factor in the credit: Most employers qualify for a credit of up to 5.4% if they pay state unemployment taxes. This effectively reduces the FUTA tax rate to 0.6%.

Here’s the formula:

FUTA Tax per Employee = 6.0% x Minimum($7,000, Employee’s Wages) – Credit (usually 5.4%)

Note: Exceptions exist for California, New Jersey, and New York, where credit reduction programs may affect your effective FUTA tax rate. It’s always recommended to consult your state’s unemployment agency or a tax professional for the latest information.

Who Is Responsible For Paying FUTA Tax?

Employers are responsible for paying FUTA tax and submitting the corresponding forms to the Internal Revenue Service (IRS). The tax is not deducted from employee wages.

FUTA taxes help fund unemployment benefits nationwide. The tax rate is a flat 6%, applied only to the first $7,000 of wages paid to each employee annually.

There are specific tests to determine if a business needs to pay FUTA tax. Generally, if you paid wages of $1,500 or more to an employee in any quarter during the year or had employees for at least some part of a day in 20 or more different weeks, you’ll likely be responsible for FUTA tax.

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