More often than not, employers are responsible for giving people jobs. And when something goes awry in a business, such as layoffs, employers are also responsible for ensuring the people who lose their jobs have unemployment coverage as well.
According to state and federal law, most employers are obliged to pay regularly for unemployment insurance. Paying this tax ensures that people who lose their jobs through no fault of their own have a basic safety net for a limited period of time while they search for a different way to earn a living.
Paying the federal unemployment tax is where the FUTA tax comes in, which we’ll break down for you below.
Wondering more about unemployment insurance and why your company needs it? Read more about that here.
What is FUTA?
FUTA, or the Federal Unemployment Tax Act, helps provide compensation for people who have lost their jobs. FUTA is used in conjunction with state unemployment taxes. According to the IRS, employers usually have to pay both federal and state unemployment taxes.
There are three different tests that determine whether an employer needs to pay the FUTA tax: the general test, household employees test, and farmworkers test. This post will focus on the general test.
In the general test, you are subject to FUTA taxes if…
You paid $1,500 or more in wages in any calendar quarter, or
You had 1+ employees for at least part of a day in any 20 or more different weeks throughout the calendar year
Unemployment Insurance, Explained
Need more info on unemployment insurance?
When Do Employers Pay?
Employers pay FUTA taxes on a quarterly basis.
The quarters are as follows:
Quarter 1: January - March
Quarter 2: April - June
Quarter 3: July - September
Quarter 4: October - December
The tax periods always end on the last month of the quarter. Employers are obligated to pay the taxes within a month of the last quarter. So, for example, if the company Clockwork Solutions, LLC pays more than $1,500 in wages in the first quarter, they’ll have until April 30th to pay the FUTA taxes, even though the quarter ends on March 31st.
What is the FUTA Tax Rate?
As of 2016, the FUTA tax rate is 6%. Employers should calculate FUTA taxes on a quarterly basis. Once an employee reaches $7,000 for taxable wages in the calendar year, employers no longer have to deposit FUTA taxes on his wages. Note that some states have wage bases different from $7,000, so check with your local regulations.
Which Form Do You Fill Out for FUTA?
Employers fill out the 940 form for FUTA. If you want a deep dive on IRS Form 940, this blog post covers the following:
What form 940 covers
Who must file the form
Dates to file FUTA
State unemployment taxes (SUTA)
Justworks Can Help
Justworks members enjoy the luxury of knowing their state and federal unemployment taxes are filed and paid on time. Justworks also updates taxable amounts when yearly rates are adjusted. Best of all, when the paperwork is due, employers are covered for the correct agencies in every state.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.