Welcome to lesson 9.
In this lesson we'll discuss federal unemployment tax or FUTA.
At the end of this lesson you'll be able to define wages subject to FUTA.
Figure the FUTA tax due.
Describe the deposit requirements for these taxes.
Determine the simplest form for your business and explain the filing due date and how to file electronically.
Let's take a few minutes to talk about FUTA, the Federal Unemployment Tax Act, or FUTA directs the states and the federal government to make and run the unemployment tax program.
The program provides unemployment payments to workers who have lost their jobs.
The various states create the actual employment insurance systems and the federal government approves the state laws and pays the administrative costs of the state programs.
Because this is a joint program between the state and federal governments you are first subject to the state tax.
Then this tax becomes a credit against the federal tax.
In your state you may even be exempt from the tax, but still have to pay the federal tax.
You also may not owe FUTA but still need to pay the state.
See lesson 10 on how to contact your state's unemployment tax office.
Unlike other payroll taxes, this tax is the sole responsibility of the employer.
It is not deducted from the employee's paycheck.
You are an employer for FUTA tax purposes and must file and pay FUTA tax if in the current year or last year you paid wages of $1500 or more in any calendar quarter to employees.
Or had one or more employees at any time in each of the 20 or more weeks.
The 20 weeks don't have to be full weeks or consecutive.
Count all regular, temporary, and part time employees.
Including employees on vacation or sick leave.
Not all employee wages are subject to FUTA, there are exceptions for certain employers, as well as certain types of employees.
Refer to the table in Publication 15 entitled Special Rules for Various Types of Services and Payments for further detail.
You are subject to FUTA tax only if you paid total cash wages of $1000 or more for all household employees in any calendar quarter in the current or prior year.
A household worker is an employee who performs household work in a private home, local college club, or local fraternity or sorority chapter.
You are subject to FUTA tax on the wages you pay to farm workers if you paid cash wages of $20,000 or more to farm workers during any calendar quarter in the current or prior year, or you employed ten or more farm workers during at least some or part of the day, whether or not at the same time, during any 20 or more different weeks in the current or prior year.
The FUTA tax is figured on the first $7000 in wages paid to each employee during the year.
The tax is imposed on you as the employer, do not collect it or deduct it from your employee's wages.
The current FUTA tax rate is 6.2%.
You can take a tax credit against your FUTA tax for amounts you paid into state unemployment funds.
This credit can not be more than 5.4% of taxable FUTA wages but you can only take this credit in full if the taxes are paid to the state by the time you need to file your form 940 FUTA return.
If you are entitled to the maximum 5.4% credit, the FUTA tax rate, after this credit is 0.8%.
Let's try and put this to use.
Let's say last November you hired Maggie and paid her $3500 in wages before the year ended.
All $3500 was subject to the FUTA tax.
If all the required state contributions were paid on time your tax on Maggie's wages would have been $28.
Then, let's say in mid-March, Maggie's total wages for this year reached $7000.
None of the wages you pay her after that are subject to the FUTA tax for the rest of the year.
In July Maggie quits her job and you hire Karen to replace her.
The first $7000 you pay Karen this year is also subject to the FUTA tax.
Remember, the first $7000 you pay each employee each year is subject to the tax.
The FUTA tax you would pay is $56 for Maggie's wages and $56 for Karen's wages.
Your total FUTA tax, this year, is $112.
As you've learned with employment taxes, FUTA taxes also have rules on when you must deposit the taxes.
If at the end of any calendar quarter you owe, but have not yet deposited more than $100 in FUTA tax, you must deposit the FUTA tax by the last day of the first month after the quarter ends.
If the accumulated tax at the end of any of the first three quarters is $100 or less, do not deposit the amount, instead add it to the tax for the next quarter.
The due date for the first quarter is April 30th.
The due date for the second quarter is July 31st.
The third quarter's due date is October 31st and the fourth quarter is due by January 31st.
To figure your tax for each quarter, multiply 0.8%, that's .008 by the part of the first $7000 of each employee's annual FUTA tax wages that you paid during the quarter.
If your liability for the fourth quarter plus any amount not deposited from an earlier quarter is over $100, deposit the entire amount by the due date of form 940.
If it is $100 or less you can either make a deposit, or pay the tax with your form 940 by January 31st.
Most small business employers file Form 940, Employer's Annual Federal Unemployment Tax Return by January 31st, February 10th if you deposited all FUTA tax when due, and all wages that were taxable for FUTA tax purposes were also taxable for your state's unemployment tax.
Isn't there an easier way to figure this out?
Remember, you can always electronically file and save a lot of time in calculating the tax and credits and in figuring out which form to use.
Electronically filing your return is always the easiest way to go.
Some states may require that you file state unemployment taxes at various times throughout the year, but the federal unemployment tax return is filed annually.
The due date for the 940 is January 31st.
However, if you have deposited all your FUTA tax on time you are given until February 10th to file.
As with all due dates, if the date falls on a Saturday, Sunday or federal holiday, you can file on the next business day.
Most small business employers will need to file Form 940, Employers Annual Federal Unemployment Tax Return.
You'll recall from lesson six, that FUTA taxes, as they are commonly known with the state unemployment systems, provide for the payment of unemployment compensation to workers who have lost their jobs.
Go to your state's web site about it's specific requirements.
Whew!
That's a lot to learn.
Fortunately you don't need to remember everything word for word.
What you do need to remember is that FUTA taxes are a significant responsibility for all employers.
By now you've probably figured out that all the information you need is on the IRS web site.
Most of what we discussed here is in one publication, Publication 15.
That might be a good one to keep around.
And that does it for lesson nine.
Thanks for hanging in there with me, you've gotten off to a great start with this workshop.
Good luck in your new business.
For resources discussed in each lesson, please visit the Lesson 10 Supplement.
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