As an employer, your business is responsible for paying unemployment taxes to the IRS and making reports to the IRS on Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return
Unemployment Taxes at the State Level
Both the federal government and most state governments collect unemployment taxes. The federal government collects unemployment funds and pays into state funds—known as State Unemployment Tax (SUTA). The federal funds help to supplement what the states collect.
Employers pay into the system, based on a percentage of total employee wages.You don’t deduct unemployment taxes from employee wages.Most employers pay both federal and state unemployment taxes.Employers must pay federal unemployment taxes and file an annual report.The tax paid goes into a fund that pays unemployment benefits to employees who have been laid off.
Many employers pay both federal and state unemployment taxes, depending on what state you are doing business in. To find out if you, as a business owner, need to pay state unemployment tax, contact your state’s employment agency. If your state collects this tax, you will need to register with your state.
The Federal Unemployment Tax Process
Every employer must:
Calculate its FUTA tax liability for each payroll,Set aside an amount after each payroll equal to that liability,Make periodic payments to the IRS, based on the amount owed, andSubmit an annual report on Form 940 Employer’s Annual Federal Unemployment (FUTA) Tax Return.
Calculating Your FUTA Tax Liability
You must pay unemployment taxes if:
You paid wages of $1,500 or more to employees in any calendar quarter of a year, orYou had one or more employees for at least some part of a day in 20 or more different weeks during the year.
You must count all employees, including full-time, part-time, and temporary workers. Don’t count partners in a partnership, and don’t count wages paid to independent contractors and other non-employees, You must pay federal unemployment tax based on employee wages or salaries. The FUTA tax is 6% (0.060) on the first $7,000 of income for each employee. Most employers receive a maximum credit of up to 5.4% (0.054) against this FUTA tax for allowable state unemployment tax. Consequently, the effective rate works out to 0.6% (0.006).
Payments to Employees Exempt from FUTA Tax
Some of the payments you make to employees are not included in the calculation for the federal unemployment tax. These payments include:
Fringe benefits, such as meals and lodging, contributions to employee health plans, and reimbursements for qualified moving expenses,Group term life insurance benefits,Employer contributions to employee retirement accounts (like 401(k) accounts), andDependent care payments to employees.
If you pay employee moving expenses and bicycle commuting reimbursements to employees, you must include the amount of these payments in the FUTA tax calculation.
In some states, wages paid to corporate officers, certain payments of sick pay by unions, and certain fringe benefits are also excluded from state unemployment tax. If wages subject to FUTA aren’t subject to state unemployment tax, you may be liable for FUTA tax at the maximum rate of 6%.
How to Calculate FUTA
Only the first $7,000 of payments to any employee in a calendar year is subject to FUTA tax (after deducting To calculate your FUTA tax liability for each payroll, follow this process: Begin with the FUTA taxable wages for a pay period (that is, gross pay of employees), plus:
Most fringe benefits, including wages and salaries, commissions, fees, bonuses, vacation allowances, sick pay, and the value of goods, lodging, food, and other non-cash benefits, andEmployer contributions to employee retirement plans, andOther specific payments, as noted above.
From this amount, deduct:
All payments that are exempt from FUTA tax (see below) andAll amounts for each employee over $7,000 for the year.
You will need this total for all employees for the FUTA report on Form 940. Then, take the total amount up to $7,000 for all employees and multiply it by 0.6% (0.006) to get the amount of unemployment tax due. Set aside this amount in a liability account (Unemployment Taxes Payable).
When FUTA Deposits Are Due
At specific times, you must make FUTA tax payments to the IRS. If your company has a FUTA Tax liability in any one quarter of the year of more than $500, you must make a deposit by the last day of the month the follows the end of the quarter. The payment dates are:
For 1st quarter ending March 31, payment is due April 30For 2nd quarter ending June 30, payment is due July 31For 3rd quarter ending September 30, payment is due October 31For 4th quarter ending December 31, payment is due January 31 (of the following year)
For example, if your liability in Quarter 1 (ending March 31) is $350, you do not need to make a deposit. If your liability in Quarter 2 (ending June 30) is $200, your accumulated liability is $550 (it’s over $500), and you must make a deposit by July 31. Since you have made a deposit for Quarters 1 and 2, if your tax liability for Quarter 3 (ending September 30) is under $500, you do not need to make a deposit for the 3rd Quarter. If your unemployment tax liability at the end of the year is over $500, you must make a deposit by January 31 of the following year or with your Annual Unemployment Tax Report on Form 940.
Filing Form 940 with the IRS
IRS Form 940 is due on January 31 of the year after the year of the report information. For example, the 940 for 2020 is due January 31, 2021. The best way to file by IRS E-file. The calculations for FUTA tax are complicated. A payroll processing service can help you figure out how much to pay and when.
