Charles Read, CPA, USTCP, IRSAC
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The Federal Unemployment Tax Act (FUTA), with state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs. Most employers pay both a federal and a state unemployment tax. For a list of state unemployment agencies, visit the US Department of Labor’s website at oui.doleta.gov/unemploy/agencies.asp. Only the employer pays FUTA tax; it isn’t withheld from the employee’s wages.
Who Must Pay?
In general, if you have paid employees more than $1,500.00 in a calendar quarter, and you had employees for some part of a day in each of 20 weeks for this year or last year, you will be subject to FUTA. That is basically everyone who has an employee.
There are special rules for household employees or farmworkers.
Figuring FUTA Tax
For 2021, the FUTA tax rate is 6.0%. The tax applies to the first $7,000 you pay to each employee as wages during the year. The $7,000 is the federal wage base. Your state wage base may be different.
Generally, you can take a credit against your FUTA tax for amounts you paid into state unemployment funds. The credit may be as much as 5.4% of FUTA taxable wages. 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, on time, and on all the same wages that are subject to FUTA tax. In some states, the wages subject to state unemployment tax are the same as the wages subject to FUTA tax.
However, certain states exclude some types of wages from state unemployment tax, even though they’re subject to FUTA tax (for example, wages paid to corporate officers, certain payments of sick pay by unions, and certain fringe benefits). In such a case, you may be required to deposit more than 0.6% FUTA tax on those wages. See the instructions for Form 940 for further guidance.
If you acquired a business from an employer who was liable for FUTA tax, you may be able to count the wages that the employer paid to the employees who continue to work for you when you figure the $7,000.00 FUTA tax wage base. See the Instructions for Form 940 for more information.
Depositing FUTA Tax
For deposit purposes, figure FUTA tax quarterly. Determine your FUTA tax liability by multiplying the amount of taxable wages paid during the quarter by 0.6%. Stop depositing FUTA tax on an employee’s wages when he or she reaches $7,000 in taxable wages for the calendar year.
If your FUTA tax liability for any calendar quarter is $500 or less, you don’t have to deposit the tax. Instead, you may carry it forward and add it to the liability figured in the next quarter to see if you must make a deposit. If your FUTA tax liability for any calendar quarter is over $500 (including any FUTA tax carried forward from an earlier quarter), you must deposit the tax by EFT.
Deposit the FUTA tax by the last day of the first month that follows the end of the quarter. If the due date for making your deposit falls on a Saturday, Sunday, or legal holiday, you may make your deposit on the next business day.
If your liability for the fourth quarter (plus any undeposited amount from any earlier quarter) is over $500, deposit the entire amount by the due date of Form 940 (January 31). If it is $500 or less, you can make a deposit, pay the tax with a credit or debit card, or pay the tax with your 2020 Form 940 by January 31, 2021. If you file Form 940 electronically, you can e-file and use EFT to pay the balance due. For more information on paying your taxes with a credit or debit card or using EFT, go to IRS.gov/Payments.
Reporting FUTA Tax
Use Form 940 to report FUTA tax. File your Form 940 by January 31 of the year following your payroll calendar year (i.e. for 2021 payroll, the Form 940 must be filed by January 31, 2022).
Form 940 E-file
The Form 940 e-file program allows a taxpayer to electronically file Form 940 using a computer with an Internet connection and commercial tax preparation software. For more information, visit the IRS website at IRS.gov/EmploymentE-file, or call 866-255-0654.
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