What Is the FUTA Tax?
Federal law requires employers to pay taxes mandated by the Federal Unemployment Tax Act. FUTA taxes are collected to make unemployment payments to workers who lose their jobs. Generally, federal FUTA taxes are combined with state unemployment systems.
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Basics
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Employers are required to pay FUTA taxes. FUTA taxes are not considered withholding as employees do not have FUTA taxes withheld from their paychecks. There are three tests to determine whether an employer is required to pay FUTA taxes with respect to certain employees. If an employer meets the criteria in a test, then the employer must pay FUTA taxes on the employees that fall within that category.
General Test
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You will be required to pay FUTA taxes if you have employees that meet one of the following statements. First, if currently or in the preceding calendar year, you employ employees who are not household workers or farmworkers and you paid these employees more than $1,500 in any calendar quarter. Or second, if you had at least one employee for part of a day in 20 or more weeks.
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Household Employees Test
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If you employ a household worker and pay him more than $1,000 in any calendar quarter, you must pay FUTA taxes. The Internal Revenue Service defines a household employee as an individual "who performs household work in a private home, local college club, or local fraternity or sorority chapter."
Farmworkers Test
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If you employ farmworkers and you paid them more than $20,000 during any calendar quarter or you had at least 10 farmworkers for a day in 20 or more weeks, you must pay FUTA taxes.
Amount
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The current federal FUTA tax rate is 6.2 percent. This tax applies to the first $7,000 that an employer pays an employee during the year. Depending on the state in which the employer operates, a credit against state unemployment taxes may be available.
Reporting and Deposits
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FUTA taxes are to be reported to the IRS annually on Form 940; however, you should determine your FUTA tax liability and deposit your FUTA taxes on a quarterly basis. You should stop making FUTA tax deposits once your employee reaches $7,000 in taxable wages during a calendar year.
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References
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