FUTA Tax Overview: Calculation Methods Explained

• What is FUTA tax?
• Who is required to pay FUTA taxes?
• How much is the FUTA tax rate?
• How are unemployment benefits calculated and distributed?

Let's discuss what is FUTA tax or the Federal Unemployment Tax Act. In this informative guide, we'll delve into the intricacies of FUTA Tax. 

Working professionals must comprehend what FUTA tax is and have a solid understanding of the statute. Allow us to guide you through the FUTA tax in detail below. 

“The Federal Unemployment Tax Act, or FUTA, is a crucial piece of federal legislation. It is a program that aims to offer; monetary aid to qualifying employees terminated due to circumstances beyond their control.“

The federal government's vital initiative (Implementing the FUTA law) guarantees provisional financial security and alleviates the weight of unemployment while individuals seek alternative employment opportunities.

But the question is, what exactly is FUTA tax? 

What is FUTA Tax?

The Federal Unemployment Tax Act is a mandatory payroll tax imposed on all businesses with employees in the United States.

What is FUTA Tax Purpose? 

"The primary objective of the Federal Unemployment Tax Act (FUTA); is to provide money--for unemployment payments and job service programs in each state. The FUTA revenue will then be utilized by state unemployment insurance agencies (SUIA) to fund these benefits."

FUTA enables employees who leave their jobs against their will and meet the requirements to claim unemployment insurance. Employers paying FUTA must file Form 940 annually with the Internal Revenue Service (IRS); however, a few employers make their tax payments in parts throughout the year.

Connect with us if you want to learn about global taxes. 

What is FUTA Tax For Agricultural Employers Who Employ Farm Workers & Must Pay FUTA Taxes

Federal regulations show farmworkers receive $20K or more in cash wages each quarter. These payments aimed to support diligent individuals employed in agricultural labor and were made solely using legal tender. 

To ensure fairness for workers and promote sustainable agriculture, rigorous surveillance and meticulous documentation are vital when managing payroll operations. Meeting wage thresholds of over $20K per quarterly interval throughout the year is essential for organizations employing farm laborers. 

In summary, farmers paid a hefty sum of $20K or more to farmworkers during any quarter of the year as required by law. If they employed ten or more farm workers for at least 20 weeks in a calendar year.

Note: Read our informative What is Fair Labor Standards Act (FLSA) guide.

What are FUTA Taxes & its Benefits?

Taxes in the USA are essential for people who live there. Employers, including small businesses, must pay FUTA Tax if they meet minimum (at least one) of the following requirements.

• The business paid at least "$1.5K" in employee wages during a calendar quarter.
  
  
• The business hired/employed one or more employees for "at least part of a day in 20 or more different weeks" throughout the calendar year, including full-time, part-time, and temporary workers.
  
  
• Starting from 2024, "the FUTA tax rate in the USA is 6% on the first $7K of each employee's wages" during the calendar year. Any amount exceeding this threshold is not subject to FUTA tax.
  
  
• Employers who pay state unemployment taxes may also be eligible for a "5.4% federal tax credit," which can be applied to the FUTA tax and effectively "reduces its rate to 0.6%."
  
  
• The process of paying FUTA taxes depends on the amount owed. If tax liabilities are $500 or less during a quarter, that amount will carried forward until it exceeds $500. If the liability remains at $500 or less throughout the calendar year, companies must submit Form 940 with payment by January 31 of the following year.
  
  
• Organizations with FUTA tax obligations exceeding $500 must render at least one quarterly disbursement. For example, if a company's initial-quarter commitment amounts to $700, the payment must be duly submitted by the culmination of April. In contrast, if the liability for that quarter only totals $400, it may be deferred and carried over to subsequent quarters until it eclipses the prescribed threshold of $500.
  
  
• Most businesses typically follow the requirements above, but household and agricultural employers have different FUTA reporting obligations.
  
  
• Household employers must pay FUTA taxes on issued wages, such as people who hire a babysitter, nanny, maid, or other individuals for services within their homes.
  
  
• The employer paid $1K or more in cash wages to a household employee in any quarter of the year. This amount could also be called $1K or higher in cash wages disbursed quarterly to a domestic worker. 

Additionally, it can be described as a cool $1K or more given out as cold hard cash wages to a household employee during any quarter of the year.

The household employee performed work in various settings, including private homes, local college clubs, and fraternities.

What is FUTA Tax: Key Points to Consider

It is clear what is FUTA tax for professionals and farmers. However, there are still a few critical considerations about that law.

What is the FUTA tax for Self Employed Workers?

There is "No FUTA Tax" for independently employed people. If you are a partner, your distributive portion of partnership benefits is exempt from FUTA tax. Similarly, if you hire self-employed individuals for your business, there is no requirement to pay FUTA on their payments.

What is the FUTA Tax For Businesses?

Businesses pay FUTA as a tax to the federal government. Workers do not settle any FUTA charge or have anything deducted from their checks. The tax applies to every worker's first $7K wages (excluding compensation excluded from FUTA). 

The IRS has a tax reserve specifically designated to pay unemployment remuneration. The FUTA fund primarily applies to workers who have lost their jobs, excluding cases of misconduct resulting in dismissal.

The Federal government can provide monetary assistance for unemployment benefits when states lack sufficient resources to cover them. Even though each state has its guidelines, they may occasionally need more funds. In such cases, What does the FUTA tax fund offer? Well, it is financial aid for these benefits upon request from the state.

Any business that has paid $1.5K or more in compensation during any calendar quarter should pay FUTA tax on every worker's first $7K of wages each year. However, anything past this limit is non-taxable. Unlike charges under FICA (or the Federal Insurance Contributions Acts), it's the employer who pays this tax instead of their employees.

Any businesses that have hired at least one or more employees for a minimum part of a day, for at least 20 weeks in a single year, must settle their FUTA tax.

Now, you understand what is FUTA tax and how it applies to your business or employment. Let's learn the calculations of the FUTA tax in the next section.

Note: Looking for a Global Payroll Solutions for your organization? Contact us for the end-to-end services.

Calculating FUTA Tax:

Takeaways

The Federal Unemployment Tax Act (FUTA) is only imposed on employers, not employees. As an employee, you don't have to pay this additional tax. Such acts and laws play a crucial role in our society in helping unemployed individuals. 

What is FUTA Tax: FAQS

These frequently asked questions will help you understand what FUTA tax is, and you can still contact us with any questions. 

What tax documents are required to pay FUTA?

The Federal Unemployment Tax Act (FUTA) and the State Unemployment Tax Act (SUTA) play pivotal roles in determining tax liabilities. Depending on the geographical location, SUTA taxes can amount to anywhere from 2% to 5% of an individual's declared wages.

Employers who promptly remit their taxes can become eligible for a lucrative tax credit of up to 5.4%, which can also be utilized towards FUTA taxes.

The FUTA credit diminishes the sum employers must pay for unemployment taxes. Certain corporations are exempt from SUTA levies, thus rendering them ineligible for the FUTA credit.

This credit reduces the total amount that employers owe for unemployment taxes; however, some companies are exempt from SUTA taxes, so they don't qualify for the FUTA credit. 

Who is Subject to FUTA?

Most businesses must comply with FUTA if they employ workers. If a company pays employees wages exceeding $1.5K in any calendar quarter within the year, it becomes subject to FUTA regulations. 

Furthermore, if employees work part of a day for 20 or more weeks throughout the year, that company is also subject to FUTA.

Global Expansion is one of the most prominent organizations that provide global HR services and maintain employment records worldwide.

With business professionals in 214 countries and territories, we can hire, onboard, and pay your employees anywhere in the world. Our solutions allow you to add the greatest talent to your team, regardless of where they are.

Over the last 22 years, we have helped many creative start-ups and Fortune 500 firms in their global development.

Contact us for global payroll solution needs.