The United States of America has separate federal, state and local governments with taxes imposed at each of these levels, respectively. Generally, taxes are levied on a person and business establishments, which are determined by various factors, such as income, payroll, property, estates, sales, imports, capital gains, dividends, gifts, and fees. In this blog, we will learn about FUTA – What Is The Federal Unemployment Tax Act? including its criteria, exemption and eligible taxpayers and much more.
The greatest impact of taxes is on labor income in comparison to capital income. Most federal, state and local governments impose taxes on the net income of individuals and corporations. In the US, citizens and residents (including immigrants) are taxed on worldwide income and are allowed a credit for foreign taxes.
Income subject to tax determines under the tax accounting rules, not financial accounting principles, and includes almost all income from whatever source it may be. Most business expenses reduce taxable income, though limits apply to a few expenses only.
Individuals have permission to reduce taxable income by personal allowances and certain non-business expenses, including home mortgage interest, state and local taxes, charitable contributions, and medical and certain other expenses incurred above certain percentages of income. Rules for determining taxable income often differ from federal rules.
In this blog, we shall explain more about the Federal Unemployment Tax Act (FUTA) and also lay down insights of its importance to individuals and corporations.
The Federal Unemployment Tax Act (FUTA) is a payroll tax that is paid quarterly or annually. For most businesses, the FUTA rate is 0.6% of the first $7,000 of employee wages.
Even though unemployment taxes come from payroll, they are not deducted from each employee’s paycheck like Social Security.
Unemployment taxes are collected from the employer, not the employees. This is to fund unemployment benefits for employees who lose their jobs. Most businesses also have to comply with their state’s State Unemployment Tax Act (SUTA), which coordinates with the Federal Unemployment Tax Act (FUTA).
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The federal and state governments collect unemployment taxes. Once the federal government collects its portion, however, the money is sent to the states, so it all essentially goes to the same place.
(a) Your employees received at least $1,500 in wages within a calendar quarter during the current or previous year.
(b) You employed one or more people for at least 20 weeks during the current or previous year. This includes full-time and part-time employees, but not independent contractors.
Unless your business registers as a corporation (but not a family-run corporation), business owners do not have to pay federal or state unemployment taxes on their own income. If you are the owner of a family-run corporation or partnership, your child’s wages and spouse’s wages negate the need to pay both taxes.
A few businesses, such as religious institutions and non-profit organisations are legally exempt from paying both FUTA and SUTA taxes. Exemptions may be applicable to certain household and agricultural workers, too.
Since every state has its own SUTA requirements, business owners get advise to contact their state’s unemployment tax agency to confirm whether or not they have to pay SUTA taxes.
The following wages are exempted from Federal Unemployment Tax Act (FUTA) payments:
Wages for services performed outside the United States.
Paid to the deceased employee or a deceased employee’s estate in any year after the year of the employee’s death.
Paid by a parent to a child under age of 21, paid by a child to a parent, or paid by one spouse to the other spouse.
Wages paid by a foreign government or an international organization.
Wages paid by the state or local government or by the United States federal government.
Paid by a hospital to interns.
Wages paid to newspaper carriers under age 18.
Wages paid by a school to a student.
Paid by an established seasonal camp to a student who worked fewer than 13 calendar weeks during the calendar year.
Wages paid by non-profit organizations.
The tax rates for FUTA and SUTA derive from the number of your employees’ wages, though there are certain limits that will be discussed in the following section. Wage limits are subject to change but reportedly have remained the same for several years now.
As of April 2019, the FUTA tax rate is 6% of the first $7,000 in wages that an employee has received over the course of a calendar year. So, the most you will have to pay per employee is $420, which is 6% of $7,000. For example, if an employee makes more than $7,000 in a calendar year, the FUTA tax would still be $420. But, if an employee makes $5,000 in a calendar year, then the FUTA tax would be $300, which is 6% of $5,000.
Business owners who pay their state unemployment taxes on time, however, are typically awarded a credit of 5.4%. So, your new FUTA tax rate would, therefore, be 0.6%. That 5.4% credit is not available, however, for businesses that locate in what is “credit reduction” states. This refers to US states and territories that have not repaid loans they received from the federal government in order to fund unemployment insurance payments.
Visit the Department of Labour’s credit reduction page for an updated list of all states that currently fall into this category.
The US Virgin Islands is the only one territory which was deemed a credit reduction state. Instead of the full 5.4%, employers based in the Virgin Islands received a credit reduction of only 2.4%.
State Unemployment Tax Act (SUTA) rates vary from state to state and business to business, but the minimum is 0.05% and the maximum is 14%, respectively. In many states, for example, lower rates reserve for new businesses, while higher rates usually assign to businesses such as in industries with the highest employee turnover rates.
The Amount of unemployment claims business has received from former employees can affect your SUTA rate as well. New business owners can learn SUTA rate after receiving their Employer Identification Number (EIN). Once you have your EIN, you can contact your state’s unemployment tax agency and establish a SUTA tax account. Agency will update you should your SUTA rate change.
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Okay! Let’s say your business has employees based in multiple states, or employees who work in one state but lives in another location. Therefore, businesses of this nature must take a four-part test from the US Department of Labour in order to determine which state’s unemployment taxes they must pay.
This test will ask for employee-related information, such as the employee’s residence and the location where he or she usually works. In most cases, the answer to the second question will tell you which state’s unemployment taxes you must pay.
That is unless your state has what is a “reciprocal agreement” with your employee’s state. This would allow you to only file and pay unemployment taxes to the state in which your business is located, even though your employee is not based in this location.
FUTA taxes file via an IRS Form 940 and is due on January 31st, or the next business day, in case if January 31st falls on a weekend. This due date only applies to the filing of FUTA taxes. Many business owners mistakenly assume that the actual payment is due with the IRS Form 940, which would mean that there was only one, annual FUTA payment.
But if your expected FUTA tax liability exceeds $500 for the year, then you must pay FUTA taxes every quarter. Here is a detail list of when each of these four payments is due:
First-quarter (Jan. 1 to March 31): Payment due by April 30
Second-quarter (April 1 to June 30): Payment due by July 31
Third-quarter (July 1 to Sept. 30): Payment due by Oct. 31
Fourth-quarter (Oct. 1 to Dec. 31): Payment due by Jan. 30
So, if your expected FUTA tax liability for the year doesn’t exceed that amount, then you have two options: You can either make quarterly payments or pay once a year when you file your IRS Form 940. However, If your expected FUTA tax liability for the quarter is less than $500, you can attach that amount on to your payment for the next quarter.
These filing deadlines only apply to FUTA. On the other hand SUTA deadlines, vary from state to state. It recommends contacting your state unemployment agency to find out when SUTA taxes must be reported and paid.
Most businesses are unable to lower their FUTA tax rate. Everyone pays that same 0.6% of an employee’s first $7,000 in annual wages. The amount you pay in FUTA taxes, however, can be affected by a number of factors.
SUTA, on the other hand, is different in that there are several things you can do in order to lower your actual rate, along with the total amount you pay. Here are a few ways to keep both taxes low:
Failing to pay FUTA and SUTA taxes on time will most certainly result in penalty fees, which can range from 2% to 25%. Thus, you can avoid this by filing your taxes on the given date.
Besides paying on time, another factor for determining your total FUTA and SUTA taxes is employee turnover. For instance, let’s say you have to hire three different people for the same position within a year’s time. Your total FUTA tax would be three times the amount of what you would be paying, had your original employee stayed onboard.
Businesses with more unemployment claims pay higher SUTA taxes. Unemployment claims are valid but you may receive one that appears to be inaccurate. In most states, employers give the permit to appeal claims for unemployment compensation. Any remotely questionable claims should, therefore, be responded to as quickly as possible. If the state determines that the claim is, fraudulent, your SUTA rates will remain unaffected.
Compared to other business taxes, the guidelines for paying FUTA and SUTA taxes are fairly simple to follow. The rates are also lower than other taxes and most states allow you to even make payments online. Filing and paying unemployment taxes will soon become second nature. So, as long as you pay your taxes on time and build employee loyalty, you can disregard FUTA and SUTA taxes from your list of tasks that are worth stressing over.
