Understanding the Federal Unemployment Tax Act (FUTA) Summary
The Federal Unemployment Tax Act (FUTA) a federal law that requires employers to pay taxes that fund unemployment benefits for workers who have lost their jobs. FUTA is separate from state unemployment insurance (SUI), which is also paid by employers.
How FUTA Works
Employers must pay FUTA taxes on the first $7,000 of each employee’s wages. The current FUTA tax rate is 6%, although some employers may be eligible for a credit of up to 5.4% if they also pay state unemployment taxes on time. This credit reduces the effective FUTA tax rate to 0.6%.
FUTA taxes are reported and paid separately from other payroll taxes, such as Social Security and Medicare taxes. Employers must file IRS Form 940, known as the Employer’s Annual Federal Unemployment (FUTA) Tax Return, to report their FUTA taxes.
Who Pays FUTA
Most employers are required to pay FUTA taxes, including businesses that have one or more employees for at least some part of a day in each of 20 or more different weeks in a calendar year. Some employers are exempt from FUTA taxes, such as certain nonprofit organizations and governmental entities.
The Importance of Compliance
Employers who fail to comply with FUTA tax requirements may face penalties and interest charges. Additionally, failure to pay FUTA taxes can result in a loss of eligibility for certain business tax credits.
In summary, FUTA is an important federal law that requires most employers to pay taxes that fund unemployment benefits for workers. Employers must comply with FUTA tax requirements and file the necessary forms to avoid penalties and interest charges. If you have any questions or concerns, be sure to consult a tax professional.
