The Federal Unemployment Tax Act (FUTA) falls under the category of employment taxes. As an employer who means to stay in business, you must understand, calculate, and pay them. Luckily, we’re here to talk about all those things.
There is a federal law that requires you, the employer, to pay into unemployment taxes. And these taxes only apply to employers, meaning that you will not withhold money from your employees’ paychecks. However, the amount that you have to pay on their behalf will be based on each individual employee’s salary.
How To Calculate FUTA Tax
There are two factors that play into determining how much FUTA tax you owe: the taxable wage base and the tax rate that has been set by the IRS.
For 2020, FUTA tax continues to be 6%, and the taxable wage base is $7,000. This means you will pay 6% on the first $7,000 that your employees earn.
Let’s break that down with the following example:
You are writing a paycheck to Alex Warehouse for $1000. Her total earnings for the year, however, are only $1,000. We can say that this is her first check for the year.
Billy Mulder, on the other hand, has been working for you a little longer. He is getting paid $1,200, but his total earnings for the year are $8,000.
Because Alex has not yet earned $7,000 for the year, you will pay 6% on the entire amount.
Billy’s situation is different. With the addition of his last paycheck, he has exceed the $7,000 threshold by $1000. So you will only pay 6% on $200 (1200-1000) of his paycheck.
You can actually lower the 6% you owe towards FUTA down to .6%. Because you will also pay into SUTA, you are eligible for a FUTA credit of up to 5.4%.
The other requirement to get your 6% lowered is that you don’t work in a credit reduction state. These are states who have borrowed from the federal unemployment trust fund but have not paid back that debt before its due date.
FUTA Tax Due Dates
These are due quarterly, the dates are as follows:
Quarter 1: April 30
Quarter 2: July 31
Quarter 3: Oct 31
Quarter 4: Jan 31
To report your quarterly FUTA contributions, you will use IRS Form 940.
Paying your employees and documenting your FUTA contributions is as easy as you want them to be. Use 123PayStubs to generate quick and accurate pay stubs. Every dollar you pay out will be documented and at your disposal. When it comes time to submit your Form 940, you will have all the information you need.