Understanding your tax obligations as an employer is crucial for compliance and financial stability. One such obligation is the Federal Unemployment Tax Act (FUTA) tax. This guide provides a comprehensive overview of what FUTA tax is, who is required to pay it, how it’s calculated, when to file and deposit, and other important considerations.
Who Pays FUTA Tax?
FUTA tax is a federal tax levied on employers to fund state workforce agencies. These agencies administer unemployment benefits to workers who have lost their jobs. Unlike many other payroll taxes, FUTA tax is paid exclusively by employers and is not deducted from employee wages. There are three tests to determine FUTA liability: a general test, a household employees test, and an agricultural employees (farmworkers) test.
Under the general test, you’re subject to FUTA tax on the wages you pay employees who aren’t household or agricultural employees and must file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return for 2024 if:
- You paid wages of $1,500 or more to employees in any calendar quarter during 2023 or 2024, or
- You had one or more employees for at least some part of a day in any 20 or more different weeks in 2023 or 20 or more different weeks in 2024. Count all full-time, part-time, and temporary employees. If your business is a partnership, don’t count its partners.
If a business was sold or transferred during the year, each employer who meets one of the above conditions must file Form 940. However, don’t include any wages paid by the predecessor employer on your Form 940 unless you’re a successor employer. For details, see “Successor employer” in the Instructions for Form 940. If you won’t be liable for filing Form 940 in the future, see “Final: Business closed or stopped paying wages” in the Instructions for Form 940 PDF.
For the household employees test and the agricultural employees (farmworkers) test, see Section 14, Federal Unemployment (FUTA) Tax in Publication 15 (Circular E), Employers Tax Guide. Additional information for household employers is available in Publication 926, Household Employer’s Tax Guide and Topic no. 756. Additional information for agricultural employers is available in Publication 15 and Topic no. 760, Reporting and deposit requirements for agricultural employers.
Understanding the FUTA Tax Rate and Wage Base
The FUTA tax rate is currently 6.0% on the first $7,000 you paid to each employee as wages during the year. This $7,000 limit is known as the federal or FUTA wage base. It’s important to note that your state wage base might differ based on state-specific regulations.
Generally, if you paid into state unemployment funds, you may receive a credit of up to 5.4% of FUTA taxable wages when you file your Form 940. If you’re entitled to the maximum 5.4% credit, the FUTA tax rate after credit is 0.6%. You’re entitled to the maximum credit if you paid your state unemployment taxes in full, by the due date of your Form 940, and on all the same wages as are subject to FUTA tax and the state isn’t determined to be a credit reduction state. See the Instructions for Form 940 to determine the credit.
Credit Reduction States: Impact on FUTA Tax
A “credit reduction state” is one that has not repaid money it borrowed from the federal government to cover unemployment benefits. The Department of Labor manages this loan program and identifies credit reduction states annually.
If you pay wages subject to unemployment tax in a credit reduction state, the credit you can receive for state unemployment tax paid is reduced. This reduction results in a higher federal unemployment tax liability when filing Form 940. You must include Schedule A (Form 940), Multi-State Employer and Credit Reduction Information PDF with your Form 940 if you paid wages to employees in more than one state or if you paid wages in any state subject to credit reduction. Staying informed about your state’s credit reduction status is vital for accurate tax calculations.
FUTA Tax Filing Deadlines
The due date for filing Form 940 is January 31st of each year. However, if you deposited all FUTA tax when due, you have until February 10th to file. If the due date falls on a Saturday, Sunday, or legal holiday, you can file the return on the next business day. A legal holiday refers to any legal holiday in the District of Columbia. For a list of legal holidays, refer to Publication 15 (Section 11, Depositing Taxes – Deposits Due on Business Days Only).
Depositing FUTA Tax: When and How
While Form 940 covers the entire calendar year, you may need to deposit your FUTA tax before filing your return. If your FUTA tax liability exceeds $500 for the year, you must make at least one quarterly payment. If your liability is $500 or less in a quarter, carry it forward to the next quarter. Continue this process until your cumulative FUTA tax liability surpasses $500. At that point, you must deposit your FUTA tax for the quarter by the last day of the month following the end of the quarter.
If your FUTA tax liability for the fourth quarter (including any undeposited amounts from earlier quarters) is $500 or less, you can either deposit the amount or pay the tax with your Form 940 by January 31. If you’re required to make a deposit on a day that’s not a business day, the deposit is considered timely if you make it by the close of the next business day. A business day is any day other than a Saturday, Sunday or legal holiday.
Once your FUTA tax liability for a quarter (including any FUTA tax carried forward from an earlier quarter) exceeds $500, you must deposit the tax via electronic funds transfer (EFT). In years with credit reduction states, you must include liabilities owed for credit reduction with your fourth-quarter deposit.
EFT is mandatory for all federal tax deposits. You can make payments through your IRS business tax account, IRS Direct Pay for businesses, or Electronic Federal Tax Payment System (EFTPS). Refer to Publication 966, Electronic Federal Tax Payment System, A Guide to Getting Started PDF for EFTPS information, and Publication 15 for more information on deposit rules.
Key Takeaways for Employers
- Determine FUTA Liability: Use the provided tests to assess if you’re required to pay FUTA tax.
- Understand the Tax Rate and Wage Base: Keep track of the current FUTA tax rate and wage base.
- Monitor Credit Reduction States: Stay informed about your state’s credit reduction status.
- Adhere to Filing Deadlines: Mark your calendar with the relevant filing deadlines for Form 940.
- Comply with Deposit Requirements: Understand the rules for depositing FUTA tax and use EFT for payments.
By understanding and adhering to these FUTA tax guidelines, employers can ensure compliance and contribute to the unemployment system that supports workers in need.
