The federal unemployment tax act (FUTA) tax provides payments of unemployment compensation to workers who have lost their jobs. It's an employer-only paid tax. Gusto accurately calculates and withholds the FUTA tax amount throughout your payrolls, unless your company is exempt from this tax.
The FUTA tax rate is 6%, which taxes wages up to the first $7,000 earned by the employee. This totals to $420 in annual FUTA tax amount for each employee.
However, employers generally receive a credit of 5.4% for paying timely state unemployment taxes. This results in a reduced FUTA tax rate of 0.6%, which totals to $42 in annual FUTA tax amount for each employee.
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Gusto handles all FUTA payments and filings for our payroll customers. The IRS has rules for when FUTA payments are due:
For 2023, employers in California, Connecticut, Illinois, and New York will be assessed a general FUTA credit reduction of 0.6% on wages paid to employees for work attributed to any of these states.
The reduction will cause employers to pay an effective tax rate of 0.6% + the FUTA credit reduction, or up to $84 for each employee when applied to the federal unemployment-taxable wage base of $7,000.
Every year, some states are classified as credit reduction states. These states took a loan from the federal government to help pay their state unemployment insurance benefits. If the states are not on time in paying back that loan, the federal government reduces the FUTA credit (that 5.4% from above) given to employers.
Employers in these states will owe a higher amount of tax that will be paid with the annual Federal Unemployment Form 940 in January.
The US Department of Labor finalizes the list of credit reduction states every year in November. You can read more about this credit reduction on the IRS website.
When a business or employee(s) are exempt from state unemployment, the business typically is no longer able to apply the 5.4% FUTA Credit and is liable for additional FUTA. Check out pages 3 and 4 of this IRS reference for more information.
The most common scenarios for why a business would be liable for additional FUTA are outlined below: