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FUTA Meaning – Federal Unemployment Tax Act FUTA vs SUTA vs FICA

FUTA Meaning – Federal Unemployment Tax Act

FUTAFUTA Meaning: The Federal Unemployment Tax Act (FUTA) is federal legislation that imposes a payroll tax on any business with employees. The revenue it generates is allocated to state unemployment insurance agencies.  These funds are used to pay unemployment benefits for people who are out of work. The Federal Unemployment Tax Act requires employers to file IRS Form 940 annually to report the paying of their FUTA taxes. IRS Form 940 generally must be filed in the first quarter of the year.

FUTA is the federal part of the unemployment insurance program created by the Federal Unemployment Tax Act in 1939. Employers pay FUTA tax to fund the federal government’s part in overseeing each state’s unemployment or SUTA program.

The Federal Unemployment Tax Act (FUTA) was passed in 1939. It is a federal law that raises revenue to administer unemployment insurance and job service programs in every state. As directed by the Act, employers are required to pay annual or quarterly federal unemployment taxes; they make up a part of what is commonly known as payroll taxes. The funds in the account are used for unemployment compensation payments to workers who have lost their jobs. Although the amount of the FUTA payroll tax is based on employees’ wages, it is imposed on employers only, not their employees. In other words, it is not deducted from a worker’s wages. In this way, FUTA tax differs from other payroll taxes, such as Social Security tax, which is applied to both employer and employee.

The Federal Unemployment Tax Act (FUTA) is a payroll tax paid by employers on employee wages. Employees don’t pay this tax.  Only employers do on the employee’s behalf. The tax is 6.0% on the first $7,000 an employee earns.  Any earnings beyond $7,000 are not taxed. However, in practice, the actual percentage paid is usually 0.6%.  This is due to federal credits available to prompt SUTA payments. Nevertheless, FUTA requires that employers contribute to the federal unemployment pool.  This covers employees who qualify for unemployment benefits. According to the IRS, a business owes federal unemployment taxes if:

  • It paid at least $1,500 in wages during any calendar quarter in the current or previous year. (A calendar quarter is January through March, April through June, July through September, or October through December.) Or
  • It had at least one full-time, part-time, or temporary employee for at least some part of a day in any 20 or more different weeks in the current or previous year.

FUTA taxes can be paid annually or quarterly. The amount of an employer’s FUTA tax liability determines when the tax must be paid.

FUTA Example

FUTA taxes have varied over the years. As of 2021, the FUTA tax rate was 6% of the first $7,000 paid to each employee annually. For example, consider a company that has 5 employees, and each earns wages of at least $7,000 for the year.  Therefore, the company’s annual FUTA tax would be 0.06 x ($7,000 x 5) = $2,100. Once an employee’s year-to-date (YTD) wages exceed $7,000, an employer stops paying FUTA for the amount above $7,000 for that employee. Therefore, the maximum amount an employer pays in FUTA taxes is $420 per employee.

Futa Meaning – FUTA vs SUTA (State Unemployment Taxes)

Many states collect an additional unemployment tax from employers.  This is known as state unemployment taxes (SUTA). These range from 2% to 5% of an employee’s wages. Paying SUTA taxes can lessen the burden of FUTA taxes. Employers can take a tax credit of up to 5.4% of taxable income if they pay state unemployment taxes in full and on time. This amount is deducted from the amount of employee federal unemployment taxes owed.

An employer that qualifies for the highest credit will have a net tax rate of 0.6% (calculated as 6% minus 5.4%). Thus, the minimum amount an employer can pay in FUTA tax is $42 per employee. However, companies that are exempt from state unemployment taxes do not qualify for the FUTA credit. (Source: investopedia.com)

FUTA Meaning vs FICA (Federal Insurance Contributions Act)

FUTA is for unemployment benefits for employees paid only by the employer.  It should be distinguished from FICA, which is a separate tax paid by both employers and employees.  This is to provide Social Security and Medicare benefits. The FICA tax is 6.2 percent on taxable compensation up to a fixed amount annually.  For example, $137,700 in 2020 for the Social Security portion and 1.45 percent of taxable compensation for the Medicare portion without any limit. The same amount is paid by the employer and the employee.

For example, if an employee earns $50,000, the employer’s FICA tax is $3,825 (6.2% of $50,000 + 1.45% of $50,000). The employee pays the same $3,825, which is withheld from their wages. (Source: paychex.com)

Paying and Reporting FUTA

There is an annual reporting requirement for FUTA.  However, the tax must be deposited at least quarterly if it is more than $500 per quarter. In other words, if FUTA tax liability is more than $500 for the calendar year, you must deposit at least one quarterly payment. If FUTA tax liability is $500 or less in a quarter you can carry it forward to the next quarter.  You can continue to do so until your cumulative FUTA tax liability is more than $500. At that point, you must deposit your FUTA tax for the quarter.

Deposits are made through the Electronic Federal Tax Payment System (EFTPS). If you don’t exceed the $500 threshold, you can pay the tax when you file your annual FUTA tax return.

The tax is reported on Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return. The return must be filed if:

  • Paid total wages of $1,500 or more to employees in any calendar quarter during the current or previous year.
  • One or more employees for at least some part of a day in any 20 or more different weeks in the current or previous year.

Special rules apply to employers of agricultural workers. They are in the Instructions to Form 943.

Form 940 must be filed by January 31 of the year following the year to which it relates (e.g., January 31, 2020, for 2019). (Source: ibid)

FUTA Meaning: Summary & Exceptions

The Federal Unemployment Tax Act (FUTA) raises revenue to administer unemployment insurance and job service programs in every state. As directed by the Act, employers are required to pay annual or quarterly federal unemployment taxes.  These make up a part of what is commonly known as payroll taxes. The funds in the account are used for unemployment compensation payments to workers who have lost their jobs. The amount of the FUTA payroll tax is based on employees’ wages.  However, it is imposed on employers only, not their employees. In other words, it is not deducted from a worker’s wages. In this way, FUTA tax differs from other payroll taxes, such as Social Security tax, which is applied to both employer and employee.

FUTA and SUTA only make up part of the employer’s overall payroll taxes. FICA taxes or social security and medicare taxes make up the rest of the employer’s federal payroll taxes. In most cases employers also have to pay state unemployment taxes or SUTA taxes. FICA, FUTA, and SUTA make up the overall payroll tax burden on most employers. Some wages are exempt including payments made by the federal government and wages paid by a hospital to an intern.

Exceptions

Wages that an employer pays to their spouse, a child under the age of 21, or parents do not count as FUTA wages. Furthermore, payments such as fringe benefits, group term life insurance benefits, and employer contributions to employee retirement accounts are not included in the tax calculation for the federal unemployment tax.

Up Next: What Is Fair Market Value (FMV)?

FMVFMV or Fair Market Value is the price that a willing buyer will pay to a willing seller.  It further assumes that both parties are knowledgeable and unrelated and neither is forced to make the deal.

Fair market value (FMV) in real estate is the determined price that a property will sell for in an open market. The FMV is agreed upon between a willing buyer and seller, both of whom are reasonably knowledgeable about the property in question.

Fair Market Value is very similar to market value.  The fair market value of a company’s stock refers to the price at which the stock is currently trading or the price a company will issue stock to its employees.  This valuation is used by the IRS to calculate how much tax an employee owes on any equity compensation they receive.

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