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Federal unemployment tax act (FUTA)

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 payment schedule

If your FUTA liability exceeds $500 in any given quarter payment must be remitted by the last day of the month following quarter end. Gusto handles all FUTA payments and filings for our payroll customers. 

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 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.

SUI exemptions

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:

  • Businesses with all employees exempt to state unemployment (SUI)
    • Employers that do not pay into state unemployment at all are automatically required to pay the additional 5.4% ($378) in FUTA tax on each employee's wages.
  • Businesses with a combination of employees that pay into to state unemployment & employees that are exempt to state unemployment 
    • Employers that pay into state unemployment for some employees but not others may be liable for up to the additional 5.4% in FUTA Taxes.
    • The amount of additional FUTA tax is determined by the Worksheet for Line 10 of Form 940 (found on page 12 here). The amount of additional tax due depends on how much the employer paid into state unemployment taxes. If the business paid enough into state unemployment, they may not be liable for additional FUTA tax at all. Our system automatically makes these calculations as required.  
  • Businesses that paid state unemployment tax late 
    • Employers that paid state unemployment tax late may be liable for additional FUTA tax, up to the maximum 6% rate. This is also determined by the Worksheet for Line 10 of Form 940 (found on page 12 here). Our system assumes that all state unemployment tax was paid timely. 

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