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What is FUTA?

There are other aspects of running a business besides merely making money and controlling expenses. Complying with different federal and state requirements, including tax duties, is another requirement. What is FUTA? The Federal Unemployment Tax Act (FUTA) is one of these significant responsibilities. The finer points of FUTA will be covered in this article, including what it is, how to calculate your tax liability, who is responsible for paying it, how to do so, and how it differs from the State Unemployment Tax Act (SUTA).

Understanding FUTA:

A federal law known as the Federal Unemployment Tax Act, or FUTA, is a federal law that requires employers to pay a tax to fund unemployment benefits for employees who have lost their jobs. These benefits act as a safety net for employees during periods of unemployment, helping them afford their basic needs while they look for new employment prospects.

Calculating FUTA Tax Liability:

Calculating your FUTA tax liability involves understanding the tax rate and wage base. FUTA tax rate is 6% of the first $7,000 of each employee’s annual wages. This means that the maximum FUTA tax an employer can owe for one employee in a year is $420 (6% of $7,000).

However, if you’re eligible for a state unemployment tax credit, your effective FUTA rate could be lower. The maximum credit allowed is 5.4%, which means the minimum FUTA tax rate after the credit is 0.6%.

Who Pays the FUTA Tax?

Employers normally pay FUTA tax; it is not deducted from workers’ paychecks. Most of the time, it is the employer’s responsibility to fund this tax and see to it that it is regularly paid to the Internal Revenue Service (IRS).

How to Pay FUTA Tax?

Paying FUTA tax involves reporting the tax liability and making payments to the IRS. Employers are required to file IRS Form 940, also known as the Employer’s Annual Federal Unemployment (FUTA) Tax Return, on an animal basis. This form summarizes the total wages paid to employees and the corresponding FUTA tax liability.

Employers can pay their FUTA tax liability with through electronic funds transfer or by mailing a check with Form 940. It’s crucial to meet the filing deadlines to avoid penalties and interest charges.

FUTA vs. SUTA

While FUTA is a federal program, State Unemployment Tax Acts (SUTAs) are state-level programs. Both serve the same fundamental purpose: providing unemployment benefits to eligible workers. However, there are some key differences between FUTA and SUTA:

Coverage: FUTA is a federal program that applies to all employers across the United States, regardless of their location. In contrast, SUTA is specific to individual states, and each state has its own unemployment tax system.

Tax Rates: The FUTA tax rate is standardized at 6% of the first $7,000 of wages per employee, although it may be reduced by state credits. SUTA tax rates, on the other hand, can vary widely from state to state and are influenced by factors such as an employer’s history of layoffs and the overall health of the state’s unemployment trust fund.

Taxable Wage Base: FUTA has a fixed wage base of $7,000 per employee. SUTA taxable wage bases can vary by state and may change from year to year.

Eligibility and Benefits: Eligibility for unemployment benefits and the amount of benefits an individual can receive are determined by state law and can differ from one state to another.

What is SUTA Tax?
Do I Need to Sign Up for SUTA Before I Get a Payroll Company?

Bottom Line

Understanding and complying with the Federal Unemployment Tax Act (FUTA) is a crucial aspect of running a business in the United States. By calculating your FUTA tax liability correctly, making timely payments, and distinguishing it from the State Unemployment Tax Act (SUTA), you can ensure that your business remains in compliance with federal tax regulations while contributing to the safety net that assists unemployed workers during challenging times.

Written by Mike Ritzema

Before founding Superior Trucking Payroll Service, Mike was the CFO of a trucking company with 80 trucks and a thriving brokerage. This experience gave him the perspective that a payroll solution has to make the lives of the office people better.  All the solutions he has designed are to benefit everyone.  Our company mission is to help trucking families and that includes the company owners, the drivers, and the office.

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