Everything Your Business Needs to Know About The FUTA Tax

published on 13 April 2022

If you're running a small business and you have employees, then understanding the FUTA is essential. To ensure that you're compliant with the IRS, you should learn about this. In this post, we'll cover the most common questions around FUTA.

What is FUTA?

This is the Federal Unemployment Tax Act is a form of payroll tax to be paid by employers or businesses with employees. The revenue raised via these taxes is used to provide unemployment benefits to the people out of work.

Who needs to pay?

If you are an employer, then you qualify for payment. You can also further check by taking the following tests.

-If you paid wages exceeding $1500 to employees in the calendar quarter

-If you paid wages exceeding $1000 to any household employees (household employees means anyone who worked at a private home or local college club etc)

-If you paid wages exceeding $20,000 to any farmworkers in the calendar quarter. You also need to pay if you employ 10 or more farmworkers during some part of the day or week.

Self Employed?

If you're self-employed then you DON'T have to pay the FUTA. At the same time, you won't be eligible to attain any unemployment benefits. 

Who is exempt?

-If you're a charitable, non-profit, church, or religious organization, you are exempt from this tax. You can read more about the exception requirement under section 501(c)(3) of the Internal Revenue Code here.

-If you're an employer of state or local governments

- If you're a part of an Indian tribe. Furthermore, Tribal employers are exempt from filing form 940 unless they decide against engaging in the state employment program. 

What's the 2021 Rate?

The rate is 6% on the first $7000 paid in wages (per employee). In other words, the maximum tax that you need to pay per employee, as an employer is 6% * $7000 = $420. Every time an employee makes $7000 in gross wages for the year, you can stop paying tax on that particular employee. 

When to make the payments?

Once the tax has been determined you have to make quarterly payments to the IRS. Payments can be made quarterly via the Electronic Federal Tax Payment System® tax payment service system. Employers must file IRS form 940. The payment dates can be summarised as under

Undeposited FUTA tax exceeds $500 on

-March 31: deposit tax by April 30

-June 30: July 31

-September 30: October 31

-December 30: January 31

Simply put, the payment must be made on the last day of quarter-end. If the date of payment falls on a weekend or a holiday, then payment should be made the next day. 

FUTA Vs SUTA (State Unemployment Taxes)

SUTA is an additional unemployment tax collected by a lot of states. The usual range is 0.05% to 14% for employers and can vary from state to state. Be sure to check with your state's requirements. You can always consult a payroll expert at Greyleaf to set up the whole process. SUTA payments can help you avail a tax credit of up to 5.4% of your taxable income. So, simply put SUTA payments can reduce your FUTA tax bill. Keep in mind, that if your company is exempt from SUTA taxes, then you don't qualify for any FUTA credit.

Conclusion: There are a lot of nuances to creating the payroll. Multiple deadlines and different state-wise rules can get a bit too much to handle. Cognate helps you streamline your finance and payroll.  Hop on a call today to see how we can help you simplify your tasks.

Stay tuned for more informative content

Until then. Happy Business 

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