- Stubbuilder
- Dec 14, 2023
What Is Futa Tax?
The Federal Unemployment Tax Act (FUTA) is the law that requires employers to pay payroll taxes that provide unemployment compensation to workers who have lost their jobs.
The FUTA tax is calculated based on the employee’s wages and no deduction from the employee’s paycheck. The employer is responsible for withholding and depositing taxes on time.
This blog will help you understand FUTA tax and FUTA tax credit. If you’re looking for a paycheck generator that is free to use, then visit Stubbuilder which is a 100% free tool to use. Let’s start!
Understanding Federal Unemployment Tax Act (FUTA)
The Federal Unemployment Tax Act (FUTA) tax funds each state’s unemployment insurance and job service programs. The funds provide compensation to those workers who have lost their jobs. Though the FUTA tax is a payroll tax, it is very different from the FICA tax because only the employer contributes towards the FUTA tax.
FUTA Tax is to fund the following:
- Shares of the federal government costs of unemployment programs with all the states.
- Unemployed workers are eligible to claim their unemployment insurance.
How To Calculate FUTA Tax?
FUTA Tax per employee = (Taxable Wage Base Limit) X (FUTA Tax Rate)
With the taxable wage base limit at $7,000
FUTA tax per employee = $7,000 x 6% (0.06) = $420
For example, if you have 10 employees, now we will see how to calculate the FUTA tax:
=> FUTA Tax Rate = 6% (0.06)
=> Number of Employees = 10
=> FUTA Tax per employee = $7,000 x 6%(0.06) = $420
=> FUTA Tax for the employer shall be $4,200
FUTA Tax Credit
The maximum FUTA tax credit is 5.4%. If the employer is eligible for full credit, the tax rate will only be 0.6%, i.e. 6% minus 5.4%.
Employer can claim the maximum credit of 5.4% if they can satisfy both the conditions below:
=> Paid state unemployment taxes on time in total.
=> Not working under a state which has any excellent federal unemployment insurance loans.
An employer who qualifies for a full tax credit will have a tax rate of 0.6%. This results in a minimum amount of FUTA tax of $42 per employee.
When is FUTA Tax Due?
The FUTA tax payments are due by the end of the last month following the end of the quarter.
The employer has to make payments to the IRS from time to time.
=> For Quarter 1: FUTA Tax payment is due by April 30.
=> For Quarter 2: FUTA Tax payment is due by July 31.
=> For Quarter 3: FUTA Tax payment is due by October 31.
=> For Quarter 4: FUTA Tax payment is due by January 31.
Reporting FUTA Tax On Form 940
The IRS mandates employers to report the FUTA tax on Form 940. Employer’s annual federal unemployment tax return. This form is used to notify the FUTA taxes withheld for the year and the quarterly payments made to the IRS.
Form 940 is due by January 31 every year. If you have deposited the FUTA tax on time for all quarters, you might file the form by 10th February.
Conclusion
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