If you run payroll for your business, you’re probably familiar with the term FUTA. FUTA stands for Federal Unemployment Tax Act, and it is a payroll tax that most employers must pay each quarter. FUTA goes towards paying unemployment benefits to workers who have lost their jobs. It works in conjunction with state unemployment programs to provide these benefits.
FUTA payroll tax
Employers who pay more than $1500 to employees in a year owe FUTA, so most employers are subject. FUTA rates are typically the same for all employers, but they may vary by state in some cases.
Effective FUTA rate
The FUTA rate starts out at 6% for all employers. But employers who pay their State Unemployment Insurance (SUI) tax on time typically get a credit of 5.4% (unless you are in a credit reduction state, which we’ll talk about below). That means that the effective rate for FUTA for most employers is 0.6%.
FUTA is an employer-paid tax, meaning that as an employer you don’t deduct money for it from your employees’ wages. FUTA has an effective rate of 0.6% and a wage base of $7,000. That means that you only owe FUTA on the first $7,000 you pay an employee each year.
After that, your obligation is met and you won’t owe more. That means that the maximum most employers will pay in FUTA for each employee is $420/year.
FUTA is typically due quarterly for most employers, though if you run very little payroll the IRS will let you know if you can file annually. These quarterly payments are due by the last day of the first month after the quarter ends. For example, first quarter payments for January, February, and March are due by April 30.
Credit reduction states
Some states take loans from the Federal Unemployment fund if they don’t have enough funds to pay unemployment benefits to residents of their states.
If a state has an outstanding loan balance on the first day of the year for two consecutive years, and they don’t repay the full amount of the loans by November 10th of the second year, then they are considered a credit reduction state.
Being a credit reduction state means the federal government reduces the 5.4% credit that employers are eligible for until the loan is repaid. So employers in those states will have to pay more in FUTA taxes. In 2020 there was only one credit reduction state: U.S. Virgin Islands.
But with the COVID-19 pandemic, it is possible that there will be more credit reduction states in upcoming years.
Take care of your payroll obligations
FUTA is just one of many payroll taxes that employers in the United States owe when they pay employees. It’s important to understand your payroll obligations so that you can deduct the correct amounts from your employees, calculate the amount you as an employer owe, and get all the payments and filings in on time.
This can be a lot of work, which is why many employers choose to use an online team management system like Homebase. With Homebase Payroll, you can integrate your schedule and hours worked with payroll, eliminating the need to upload files and shuffle papers between systems and ensuring you stay on top of your obligations.