The holiday season is about to arrive and the tax season will strike in no time. It is always a good idea to prepare for tax season in advance so that you can spend your holidays without worries. With this said, we’re here with another crucial read you may require for waving the tax season smoothly.
FUTA is an important part every employer and employee should understand. So, here you go!
What is FUTA Tax?
FUTA stands for The Federal Unemployment Tax Act. It is nothing but the law requiring employers to pay for the payroll taxes that further facilitate unemployment compensation to the workers not having any job on hand.
This FUTA is summed by the wages of the employee. Also, no deduction is considered while calculating FUTA from the employee’s paychecks.
Who needs to pay for FUTA?
Employers pay for FUTA as they’re the only responsible entities for withholding & depositing taxes timely. They must report FUTA by filing an annual Form 940 with the IRS.
The Federal Unemployment Tax Act requires employers to pay FUTA taxes quarterly. It is then reported on Form 940 annually.
An Overview of the Federal Unemployment Tax Act (FUTA)
The purpose of FUTA is far beyond what you think. Besides helping out workers who’ve lost their jobs, it also becomes a major source of for funding unemployment insurance. In addition, it has a crucial role in job service programs in all states.
At the end of the day, FUTA is nothing but a payroll tax. However, it isn’t similar to the FICA tax. Here, only the employer is supposed to contribute to FUTA, unlike FICA. Moreover, the employer cannot deduct any amounts from the employee’s paycheck towards FUTA taxes.
Here is what the FUTA fund contributes for:
✓ The state unemployment program
✓ The unemployed workers eligible for claiming unemployment insurance
✓ The share of the Federal Government cost of the state unemployment program
What is the maximum FUTA tax rate?
If you’re wondering How is the FUTA tax calculated in 2022? Then here’s your answer…
According to the IRS, the standard FUTA tax rate is 6%. This applies to the first $7000 of taxable wages per employee. In other words, the maximum FUTA tax rate per employee to be paid by the employer for 2022 is calculated as:
$7000 * 6% = $420
Breaking down further, if an employee starts making a gross of $7000 per year, the employer shall not pay FUTA for that employee.
The same formula applies to How is FUTA tax calculated in 2021?
What are FUTA Tax Rates & Taxable Base Limits for 2022?
The FUTA tax rate in 2021 is the same as the FUTA tax rate in 2022 – 6%. The taxable wage base limit is also the same i.e. $7000.
How to calculate FUTA Tax?
We’re sharing the basics of calculating FUTA taxes. You can simply modify the formula according to the number of employees to pay FUTA for.
✓ FUTA Tax per employee = (Taxable Wage Base Limit) x (FUTA Tax Rate).
Here, the Taxable Wage Base Limit is $7,000 so,
✓ FUTA Tax per employee = $7,000 x 6% (0.06) = $420
Consider an employer having 5 employees. So, the FUTA tax would be…
✓ FUTA Tax Rate = 6% (0.06)
✓ Number of Employees = 5
✓ FUTA Tax per employee = $7,000 x 6% (0.06) = $420
✓ The FUTA tax to be paid by the employer would be $2100. [($7,000 x 5) x $0.06]
About FUTA Tax Credit
FUTA Tax Credit is charged as 5.4%. In case the employer falls eligible for this maximum tax credit that means the tax rate is just 0.6%. In other words, it is only 6% – 5.4%.
However, FUTA Tax Credit can be claimed only if the employer satisfies both of the conditions below:
✓ If they have paid state unemployment taxes timely & fully
✓ If they aren’t operating under the state with any outstanding federal unemployment insurance loans
While we’re sharing all the possible information regarding FUTA Tax rates, let us also share when this tax amount is due.
✓ FUTA Tax Payment for Quarter 1 (January to March) is due by April 30
✓ FUTA Tax Payment for Quarter 2 (April to June) is due by July 31
✓ FUTA Tax Payment for Quarter 3 (July to September) is due by October 31
✓ FUTA Tax Payment for Quarter 4 (October to December) is due by January 31
You don’t need to deposit taxes by the end of the quarter if your FUTA Tax Liability for a single quarter is less than $500. Alternatively, you can roll over the tax liability of that particular quarter to the next one & then pay for FUTA Tax Liability if it exceeds $500.
Form 940 & FUTA Tax Reports
As mentioned above, IRS has mandatorily imposed employers to report the FUTA tax on Form 940. The due date for this Form 940 is by January 31 every year. If you’ve been filing FUTA taxes timely with each quarter then you may file this form by February 10.
Final Thoughts
If you’re looking for an efficient tool to create paystubs for your employees then use a paystub generator. What’s better than automating payroll and shredding your worries away?! Once your payroll is organized, you know what amount of FUTA tax per employee you’re liable to pay.
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