Federal unemployment tax act (FUTA)
The federal unemployment tax act (FUTA) tax provides payments of unemployment compensation to workers who have lost their jobs. It is an employer-only paid 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. Gusto accurately calculates and withholds the FUTA tax amount throughout your payrolls.
FUTA Credit Reduction States
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 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 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.