What’s Involved in Calculating FUTA Taxes?
- October 27th, 2014
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One of the many payroll taxes for which employers are responsible is the Federal Unemployment Tax Act, otherwise known as FUTA. This tax provides funding for the federal unemployment compensation program to support workers who’ve lost their jobs through no fault of their own. Unemployment taxes are different from income taxes in that the responsibility lies solely with the employer, and taxes are not taken from the employees themselves, even though the taxes are imposed on a per-employee basis.
Calculating FUTA taxes depends on a few variables, and can sometimes get a little tricky. Here are the facts on calculating FUTA taxes.
Calculating FUTA Taxes: The Facts
- FUTA tax is a single, flat-rate tax that’s imposed on the first $7,000 of each employee’s wages
- The FUTA tax rate is 6%
- If an employee makes more than $7,000 for the year, the maximum FUTA tax for which the employer is responsible is $420 (7000 x 0.06)
In addition to the Federal Unemployment Compensation Program, individual states also have their own unemployment programs, and businesses are responsible for contributing to their state’s program as well. Employers are eligible for tax credits on their FUTA tax obligation based on the taxes they pay toward their state’s unemployment program.
Calculating FUTA Taxes: FUTA Tax Credit
If you’ve fulfilled your state unemployment tax obligations before your FUTA tax return is due, you can claim a credit equal to 5.4% of your federally taxable wages, which ultimately reduces the FUTA tax rate to 0.6%. The federal tax credit for employers who’ve paid their state unemployment taxes in full and on time is set at a fixed rate, which means that even if the employer’s state unemployment tax rate is less than 5.4%, he can still claim a deduction of 5.4%. Therefore, if an employer pays all of his state unemployment taxes on time, and before his FUTA tax is due, he will only owe $42 for every employee that makes more than $7,000/year.
Calculating FUTA Taxes: Other Factors
States have the opportunity to take loans from the federal government to fund their unemployment benefits programs if they have insufficient provisions in a given year. However, there’s a set timeframe during which the loan must be repaid, and if the state becomes delinquent on such a loan, the employers in that state are penalized. As per the IRS, “If a state has outstanding loan balances on January 1 for two consecutive years, and does not repay the full amount of its loans by November 10 of the second year, the FUTA credit rate for employers in that state will be reduced until the loan is repaid.”
In the first year that a state is considered a “credit reduction state,” there is a 0.3% reduction imposed on the FUTA tax credit. That means that instead of subtracting 5.4% from the 6% FUTA tax, employers who have paid their state unemployment taxes in full before the FUTA deadline are only able to deduct 5.1% from the 6% FUTA tax, leaving them to owe 0.9% in FUTA taxes. In the second year that the state is delinquent on repaying its federal loan, there will be another 0.3% FUTA tax reduction, leaving the employer to owe 1.2% in FUTA taxes. The employer will continue to incur additional 0.3% credit reductions for every year thereafter, potentially with additional credit reductions in the third and fifth taxable years if their state remains delinquent in their loan repayment.