Federal Unemployment Tax Act (FUTA)

What is Federal Unemployment Tax Act?

The Federal Unemployment Tax Act – also known as FUTA – is a US federal law that imposes a federal payroll tax on any business that has employees. The revenue which is generated in this part is allocated to state unemployment agencies and used to fund unemployment benefits and job service programs for people who are out of work. Although FUTA is a payroll tax based on employees’ wages overall, it is imposed on employers and not their employees, which means it is not deducted from an employee’s wages. FUTA differs from the Social Security Tax, which is applied to both the employer and employees.

According to the Act, it is mandatory for employers to pay annual or quarterly taxes, and they make up a part of what is known as payroll taxes.

How to utilize Federal Unemployment Tax Act

The reporting requirements for the Federal Unemployment Tax Act vary on the entity which remits the taxes to the Internal Revenue Service by filing the IRS Form 940, which is generally filed in the first quarter of the year. FUTA taxes can be paid either annually or quarterly, and the amount of an employer’s tax liability is the main determining factor for when the tax must be paid. 

There are different requirements for various types of entities or employers:

• Business: a company needs to fulfill a minimum of one of the two following conditions in order to remit FUTA:

1. It has completed payment for at least $1,500 in wages during any quarter in the current or previous year. A calendar quarter is Jan-Mar, Apr-Jun, Jul-Sept, Oct-Dec.
2. It had at least one employee (full-time, part-time, or temporary) for at least some part of day in at least 20 different weeks in the current or previous year.

• Household Employers: this applies to employers who hire nannies, babysitters, housekeepers, or other people who provide services within one’s home. FUTA taxes must be paid if the following conditions are met:

1. The employer has paid cash wages of at least $1,000 to a household employee any time during the year.
2. The household employee has performed household work in a home, college club, or local chapter of a college fraternity.

• Agricultural/Farming Employers: FUTA taxes must be remitted if the employer meets either of the following conditions:

1. The employer has paid cash wages of at least $20,000 to farmworkers during any time during the year.
2. At least 10 farmworkers have been employed during any 20 or more varying weeks within the year.

• Other Employers: Indian tribal governments are generally exempted from FUTA tax. However, the key condition is the tribe must have participated in the state unemployment system for the whole year, and remain compliant with current and relevant unemployment laws. Other organizations exempt from FUTA include religious, educational, scientific, and charitable organizations, among others.

Conclusion

It’s important for the HR/Payroll and Finance teams to be aware of their company’s tax responsibilities and apply them accordingly. Having a full understanding of the rules around taxes is essential, and it’s a major responsibility for employers who must follow all requirements in a timely manner to avoid paying penalties.