FUTA: What employers need to know about unemployment tax

FUTA stands for Federal Unemployment Tax Act, but what does it mean for small business owners? If you’re adding employees to your small business, it likely means additional tax duties for you.

What’s more, FUTA is one of many taxes that impacts forecasting and payroll, making it important to understand as a small business owner. Let’s dig deeper into what FUTA is, the FUTA tax rate for 2021, and how unemployment tax is filed by employers.

FUTA - Federal Unemployment Tax Act document

What is FUTA and who is liable?

The Federal Unemployment Tax Act is a federal program that assists states in paying for unemployment benefits. It’s in addition to state unemployment tax and funded by the federal unemployment tax that employers pay annually.

Your small business is subject to FUTA if:

  • You pay at least $1,500 in wages to employees (other than farm workers or household workers) in any calendar quarter during the current or prior year, OR
  • You have at least one employee in any 20 weeks (whether consecutive or not) during the current or prior year who works for at least some part of the day.

The exception is if you hire independent contractors. Independent contractor earnings are not applicable to FUTA, and neither are your own if self-employed.

Do you already feel a headache coming on? Our small business certified tax pros at Block Advisors can help with your small business tax, bookkeeping, and payroll questions.

FUTA tax rate (2021) and tax credit eligibility

The FUTA tax rate is 6%. It’s applied to the first $7,000 in wages paid to each employee of your business during a single year (also referred to as the FUTA wage base). Employee earnings beyond the wage base aren’t subject to federal unemployment tax.

The good news? Your business is likely eligible for a FUTA tax credit. A credit of up to 5.4% against the FUTA tax can be made for state unemployment tax payments.

You’ll be able to claim the full credit as long as:

  • You paid state unemployment taxes in-full and on-time, AND
  • You’re not in a credit reduction state. (As it stands, the only credit reduction state is the U.S. Virgin Islands.)

If eligible, that lowers the FUTA tax rate to 0.6%.

Filing and paying FUTA tax

FUTA tax is filed using Form 940, the Employer’s Annual Federal Unemployment Tax Return. Form 940 is due each year on January 31. If liability is $500 or less, you can go ahead and pay your FUTA tax with your return via mail or e-file.

If liability is more than $500 for the calendar year, you’ll need to make at least one quarterly payment. Deposit the amount due on or before the last day of the month after the end of the quarter using the Electronic Federal Tax Payment System, (EFTPS).

Looking for additional help with federal unemployment tax?

If you’d like to learn more about FUTA or have questions about filing federal unemployment tax, Block Advisors can help. Our small business certified tax pros are able to support you through our small business services, including taxes, bookkeeping, and payroll, so you can get back to the business you love. Schedule a free payroll consultation today.

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