FUTA
FUTA stands for the Federal Unemployment Tax Act. It’s a federal law requiring that employers pay a tax to the federal government to support unemployment compensation programs.
What is FUTA?
If you have a business with employees, even just one employee, you’ve probably heard the term FUTA. Complying with the Federal Unemployment Tax Act is an important part of the responsibilities of an employer. The current FUTA tax rate is 6% on the first $7,000 of each employee’s wages, which is known as the wage base.
The FUTA tax is different from federal income tax and payroll taxes, although they’re all employment taxes. Federal income tax is withheld from employees’ wages and sent to the Internal Revenue Service (IRS). Payroll taxes (like Social Security and Medicare) are shared between employers and employees. FUTA tax is separate from both of these and doesn’t come out of employees’ checks—it’s an extra cost that employers pay.
To calculate FUTA tax liability, multiply the taxable wages for each employee (up to $7,000) by the FUTA tax rate. For example, let’s say a business owner has two employees. The business owner pays one $10,000 for the year and the other $6,000. The owner only owes FUTA tax on the first $7,000 for each person. That means the total FUTA taxable wages are $7,000 + $6,000 = $13,000.
FAQs
Are business owners required to pay FUTA tax?
Yes, business owners who paid $1,500 or more in wages in a calendar quarter, or had at least one employee work any part of a day in 20 or more different weeks during the year, are required to pay FUTA tax in compliance with the Federal Unemployment Tax Act (FUTA).
Who is exempt from FUTA tax?
Wages paid to independent contractors are exempt from the FUTA tax, because they’re not considered employees. Wages paid to family members in certain situations and wages paid by some nonprofit or government organizations may also be exempt. Check with a tax professional or attorney about FUTA tax liability.
When do I need to pay FUTA tax?
Employers must pay FUTA tax quarterly to the Internal Revenue Service (IRS) if they owe more than $500 in a quarter. If the employer owes less than $500, they can carry it forward to the next quarter until their total is $500 or more.
What’s the difference between FICA and FUTA?
FICA stands for the Federal Insurance Contributions Act and covers Social Security and Medicare taxes. Both employers and employees contribute to FICA, also known as payroll taxes. The Federal Unemployment Tax Act (FUTA), on the other hand, funds unemployment benefits and is only paid by employers.
What’s the difference between FUTA and SUTA?
FUTA is the federal unemployment tax, while SUTA stands for State Unemployment Tax Act, also called state unemployment insurance (SUI). All states have their own state unemployment insurance agencies that businesses must pay on top of the federal tax. However, FUTA allows a credit for paying SUTA on time, which lowers an employer’s federal tax bill.
What’s the difference between FICA and FUTA?
FICA stands for the Federal Insurance Contributions Act and covers Social Security and Medicare taxes. Both you and your employees contribute to FICA. The Federal Unemployment Tax Act (FUTA), on the other hand, funds unemployment benefits and is only paid by employers.
What’s the difference between FUTA and SUTA?
FUTA is the federal unemployment tax, while SUTA stands for State Unemployment Tax Act, also called state unemployment insurance (SUI). All states have their own state unemployment insurance agencies that businesses must pay on top of the federal tax. However, FUTA allows a credit for paying SUTA on time, which lowers your federal tax bill.