FUTA Tax Rate: Discover What It Is and How It Works
As an employer, you have to deal with a lot of different taxes, from income tax to Social Security, and Medicare. Now, you probably already know the basics of those tax rates.
But you shouldn’t forget about the FUTA tax rate, especially if you have multiple employees. FUTA tax is just as important as other taxes, but it can be confusing.
So keep reading to learn about the FUTA tax rate and other essential facts.
What is FUTA Tax?
FUTA tax comes from the Federal Unemployment Tax Act (FUTA), which determines where the money goes to cover the cost of unemployment insurance.
As an act, FUTA requires employers to pay taxes on employee earnings. Employees don’t have to pay the tax, but employers will use employee paychecks to determine how much money to pay towards their FUTA tax.
Businesses can expect to pay a tax at the federal level, and some states also tax businesses to cover unemployment.
What Does FUTA Tax Do?
The FUTA tax helps the country and individual states fund unemployment accounts. Whenever an employee files for unemployment, the money has to come from somewhere.
By taxing businesses on their employees, the government can have more money to pay out to people who qualify for unemployment.
Without the FUTA tax, states would have to find other ways to pay unemployed workers. Some states may need to raise income taxes or sales taxes to cover the cost.
But the benefit of the FUTA tax is that it doesn’t affect just anyone. Since businesses pay the tax on their employees, it can save consumers money while still funding unemployment benefits.
What is the FUTA Tax Rate?
If you own a business with employees, you most likely need to pay the FUTA tax. But even if you don’t have to pay it, you may want to know the FUTA tax rate.
As of 2020, the rate is 6 percent on the first $7,000 that a single employee earns. After that point, the employer won’t have to pay more in taxes.
Keep in mind that the FUTA tax rate is per individual employee. So a business with 100 employees would have to pay the tax for those 100 people. And if all 100 earned at least $7,000, the business would have to pay the full amount for the tax on each worker.
However, employers can take a credit against the FUTA tax, which is 6.4 percent. The credit will then reduce the out-of-pocket cost to 0.6 percent.
Who Pays the FUTA Tax?
The majority of employers have to pay FUTA tax, but you have to meet certain conditions. Because of this, some smaller employers may not need to pay the tax.
If you paid at least $1,500 in payroll wages during a single quarter during 2018 or 2019, you need to pay the FUTA tax.
You also need to pay the tax if at least one employee worked for a small part of the week for at least 20 weeks in 2018 or 2019. It doesn’t matter if the employee was permanent or temporary, and/or it doesn’t matter if they were full-time or part-time.
If you have household workers or farm employees, you may also need to pay the FUTA tax.
How Do You Pay the FUTA Tax?
If you find that you need to pay the FUTA tax, you will need to fill out Form 940. The form asks for information about wages that you paid and the wages that you don’t have to pay the tax on.
You only need to make a payment once the amount reaches $500, and you can pay the tax quarterly. If you have to pay $300 each quarter, you would roll over from the first quarter to the second quarter.
The second quarter would exceed the $500 threshold, so you would need to pay the tax then.
You can make the payments through the Electronic Federal Tax Payment System (EFTPS), and you can connect a business account so that the IRS can automatically debit the payment amount.
When Do You Pay FUTA Tax?
You can pay the FUTA tax as soon as you reach the $500 threshold. If you don’t reach that amount during the year, you can pay at the end of the year.
In most cases, you should make the payment before you file your taxes. But if you only need to make one payment, you may be able to wait.
You also want to make sure to file Form 940 by January 31st. If you pay the taxes early, you will have until February 10th.
Whenever you need to pay, you can do so on a business day or a weekend or holiday. If you pay on a weekend or holiday, make sure that you do so before the last business day for the quarterly payment.
Who Benefits From the Tax?
The FUTA tax benefits anyone who ever needs to collect unemployment. It also benefits states that wouldn’t otherwise have the money to pay for unemployment.
If a worker loses their job and qualifies for unemployment, they can get the benefits without the state having to worry.
Even if an employee never needs the payments, it can give people more peace of mind to know the money is there.
Now, the FUTA tax does NOT benefit workers who leave their jobs voluntarily. It only applies to people who qualify for unemployment.
What Exemptions Are There?
While a lot of employers will have to pay the FUTA tax, some may qualify for an exemption. For one, if you hire local employees and they work abroad, you won’t have to pay the tax.
The same is true for non-resident employees who work out of the country, even if the company is from the United States.
If a local employee or a non-resident employee work in the home or on a farm, the employer won’t have to pay the FUTA tax. Religious and other tax-exempt organizations are also exempt from this tax.
Paying the FUTA tax can add up, especially if you have a lot of employees. Whether you employ 10 people or 1,000 people, you should know the FUTA tax rate. If you realize that you can’t afford to pay it, you should find help.
You can also apply for a loan to cover FUTA taxes. You can learn more about it and see how our funding works to get help today!