FUTA and the FUTA rate
The Federal Unemployment Tax Act (FUTA) tax offers unemployment compensation payments to employees who have lost their jobs. This tax is solely borne by employers. Niural precisely computes and deducts the FUTA tax from your payrolls, unless your company is exempt from it.
The FUTA tax rate is 6%, applying to wages up to the initial $7,000 earned by the employee. This results in an annual FUTA tax of $420 for each employee.
Employers typically receive a 5.4% credit for promptly paying state unemployment taxes, leading to a lowered FUTA tax rate of 0.6%. This translates to an annual FUTA tax of $42 per employee.
FUTA payment schedule
Niural manages both FUTA payments and filings for our payroll clients. The IRS has established guidelines regarding the deadlines for FUTA payments:
- Should your FUTA liability surpass $500 within any quarter, the payment must be submitted by the final day of the subsequent month after the quarter's conclusion.
- If your FUTA tax liability amounts to $500 or less within a quarter, it's carried over to the following quarter. This liability accumulates until your total FUTA tax liability exceeds $500. At that juncture, a FUTA tax deposit is required during that quarter.
- If your annual FUTA tax liability is $500 or less, the tax is paid along with your Form 940 by January 31st.
FUTA credit reduction states
In 2022, employers in California, Connecticut, Illinois, and New York will face a 0.3% reduction in the general FUTA credit on wages paid to employees for work connected to any of these states. This reduction will result in an effective tax rate of 0.9%, which could reach up to $63 per employee when applied to the federal unemployment-taxable wage base of $7,000.
Annually, certain states are designated as credit reduction states. These states borrowed funds from the federal government to support their state unemployment insurance benefits. If these states fail to repay the loan promptly, the federal government decreases the FUTA credit (the aforementioned 5.4%) provided to employers. In these states, employers will be responsible for a higher tax amount, which will be paid through the annual Federal Unemployment Form 940 in January.
The US Department of Labor finalizes the roster of credit reduction states each November. You can find more information about this credit reduction on the IRS website.
Exemptions for State Unemployment Insurance (SUI)
When a business or employee(s) receives an exemption from state unemployment, the business generally can no longer apply the 5.4% FUTA Credit and becomes liable for additional FUTA. For further details, refer to pages 3 and 4 of this IRS reference.
The primary scenarios leading to a business being accountable for added FUTA are explained below:
1. Businesses with all employees exempt from state unemployment (SUI)
Employers not contributing to state unemployment must automatically pay an extra 5.4% ($378) in FUTA tax for each employee's wages.
2. Businesses with a mix of employees paying into state unemployment & employees exempt from state unemployment.
Employers contributing to state unemployment for some employees but not for others may be subject to up to an additional 5.4% in FUTA Taxes. The extent of the extra FUTA tax is determined by the Worksheet for Line 10 of Form 940 (located on page 12 here). The additional tax owed depends on the amount the employer contributed to state unemployment taxes. If sufficient state unemployment contributions were made, the business might not owe any extra FUTA tax. Our system automatically computes these calculations as mandated.
3. Businesses that paid state unemployment tax late
Employers remitting state unemployment tax late might be responsible for extra FUTA tax, up to the maximum 6% rate. This is also ascertained by the Worksheet for Line 10 of Form 940 (found on page 12 here). Our system assumes timely payment of all state unemployment tax.