FUTA – An Explanation to the Federal Unemployment Tax Act

Federal Unemployment Tax Act or FUTA for short is a part of the Internal Revenue Code and is an employer tax on wages paid to employees. It is used to fund unemployment benefits. The tax is paid on the first $7,000 of wages paid to every employee. It is reported via Form 940 https://businessecon.org/resources/. The Form must be filed and all taxes paid by January 31, 2021.

This tax is an annual tax and must be 100% paid by January 31, 2021. If all the taxes are deposited by the due date, the IRS will allow the employer to file the form no later than February 11, 2021. There is a trick; the tax is paid quarterly based on the wages paid during that quarter. At any time the tax balance exceeds a cumulative $500, you must pay the tax for that quarter by the due date. This chart illustrates the respective due dates for each quarter:

All deposits must be made via EFTPS used by the IRS.

The tax is calculated at a rate of 6.0% of all wages paid to each employee up to $7,000. If you pay more than $7,000 to each employee, the tax is capped at $420.00 each. The IRS provides a credit of 5.4% of all wages up to $7,000 contingent on the employer’s participation in their state’s unemployment program. This means that if you pay so much as $1 to your state’s program and fulfill all the reporting requirements and meet the respective deadlines of your state’s program, you can get a credit of $378.00 for each employee. It is important for the employer to participate in their state’s program. To get this credit you must:

    1.      Participate in your state’s unemployment program by filing and paying all taxes on time. AND…
    2.      File your Form 940 and pay your FUTA taxes on time.

THERE ARE NO EXCEPTIONS TO THESE RULES.

Wages includes all forms of gross salaries paid to any legal employee of the company. This includes any wages paid to the owner provided the owner receives wages via a formal payroll. Another way to say this is if the owner receives a W-2 at year end from the business, then the first $7,000 of his/her wages are taxable. 

There are some forms of business or employee exceptions to the FUTA. The following is a short list:

•    501(c)3 organizations (This does not mean all non-profits.)
•    Indian Tribal Governments
•    State and Local Governments

Credit Reduction

During the rough economic period of 2008 – 2011, some states borrowed money from the federal government to fund their unemployment benefits. Some of these states have failed to fully reimburse the federal government. Therefore, the IRS is directly assessing the employers in each of these states by reducing the federal tax credit currently at 5.4% in .3% increments. Some states have failed to even begin the payback and their credit reductions are higher. This shifts the burden onto the employers to directly pay back the loan to the federal government. The following states have failed to comply.

States with a .3% credit reduction:

• Arizona
• Delaware
• Vermont

States with a .6% credit reduction:

•  Arkansas
•  California
•  Connecticut
•  Florida
•  Georgia
•  Kentucky
•  Missouri
•  Nevada
•  New Jersey
•  New York
•  North Carolina
•  Ohio
•  Rhode Island
•  Wisconsin

States with a .9% credit reduction:

Indiana

Summary – FUTA

There are multiple resources to assist the employer in compliance with this tax. See the Resources page on businessecon.org for Instructions to Form 940 for further guidance. You may contact me via the comments section below and I will be glad to answer any related questions. Act on Knowledge.

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