What is FUTA? How to Calculate it?

FUTA is a commonly used acronym that stands for “Federal Unemployment Tax Act”. It’s a government taxation program that works with state unemployment systems to provide financial compensation (unemployment benefits) to workers who have lost their jobs 1Irs.gov. irs.gov. “Federal unemployment tax” Accessed Aug 23, 2024. through no fault of their own, meaning those who did not quit, and who were not fired.

FUTA is paid by the employer and is not taken from employee wages. In this article, we’ll answer all your questions about this important tax, including what FUTA is, how to calculate federal unemployment tax, and what the FUTA rate is for 2024. We’ll also go over the State Unemployment Tax Act (SUTA) and FICA, how to file and pay FUTA, and the exemptions available, so you can effectively navigate FUTA requirements with confidence.

Key Takeaways

• Generally, all employers must pay Federal Unemployment Tax Act (FUTA) taxes if they’ve paid a minimum of $1,500 in employee wages during a calendar quarter, or have had at least one employee for at least part of a day in 20 or more weeks of a calendar year.
• To stay compliant with FUTA tax law, employers must file Form 940 each year with the Internal Revenue Service (IRS)
• Employers have the option to pay their FUTA tax liability in installments throughout the year 
• The basic FUTA rate is 6% of the first $7,000 of each employee’s wages in the calendar year. After $7,000 in wages, the FUTA tax doesn’t apply.
• Employers who pay state unemployment taxes are eligible for up to a 5.4% federal tax credit which can be applied to the FUTA 6%, bringing the rate as low as 0.6%. 
• SUTA is a state tax that, depending on the state, can range from 2% to 5% of employee wages. 
• The deadline to file Form 940 with the IRS is January 31st of each year unless you’ve paid all FUTA due in quarterly payments, in which case the deadline is February 10.
• FICA tax differs from FUTA, as it’s a payroll tax that both the employee and employer pay to fund social services like Medicare and Social Security.
• Payments exempt from FUTA tax include fringe benefits, group term life insurance, pension contributions, dependent care, and certain other payments.

Table of Contents

• How FUTA Works
• FUTA Tax Rate 2024
• FUTA vs. SUTA Taxes
• How to Calculate FUTA Tax
• How Do You File and Pay FUTA Taxes?
• FUTA vs. FICA
• Payments Exempt From FUTA Tax
• Accurate FUTA Tax Filing Made Easy With FreshBooks Payroll
• Frequently Asked Questions

How FUTA Works

Employers, even small businesses, must pay the FUTA tax rate if they meet at least one of the following requirements:

• The business paid at least $1,500 in employee wages during a calendar quarter.
• The business had one or more employees for at least part of a day in 20 or more different weeks throughout the calendar year. This includes full-time, part-time, and temporary employees.

Employers obligated to pay FUTA must file Form 940 annually with the Internal Revenue Service (IRS). However, some employers may pay the tax throughout the year in installments.

This tax legislation applies to any business with employees. So, whether you have 5 or 50 staff on the payroll, ensure that you clearly understand FUTA before tax season rolls around.

The process of paying FUTA taxes depends on how much is owed. For example, for tax liabilities of $500 or less during a quarter, that amount is carried forward until it exceeds $500. If it remains $500 or less throughout the calendar year, the company should submit Form 940 with payment by January 31 of the following year.

FUTA tax liabilities above $500 require at least one quarterly payment. For instance, if a company’s FUTA tax liability is $700 for the first quarter ending in March, the quarterly payment should be submitted by the end of April. If the liability is $400 in the first quarter, it can be carried to the next quarter until it exceeds $500.

The above requirements generally apply to most businesses. However, household and agricultural employers are subject to different FUTA reporting requirements.

Household employers include people who hire a babysitter, nanny, maid, or other people to perform services within their private homes. They must remit FUTA taxes on issued wages if:

• $1,000 or more in cash wages were paid to a household employee in any quarter of the year
• The household employee carried out work in a private home or local college club or fraternity

Agricultural employers who employ farm workers must remit FUTA taxes if:

• $20,000 or more in cash wages were paid to farmworkers in any quarter of the year
• They employed 10 or more farm workers during some part of the day during any 20 or more weeks in a calendar year

In 2024, California, Connecticut, Illinois, New York, and the U.S. Virgin Islands are in a credit reduction state, meaning these jurisdictions haven’t repaid a loan from the federal government to meet unemployment benefit liabilities on time, which reduces the amount of FUTA that must be paid by employers who have paid wages in these states. The list of credit reduction states changes every November 2oui.doleta.gov. “FUTA Credit Reductions” Accessed Aug 23, 2024., and can be found on the Department of Labor Website.

FUTA Tax Rate 2024

The current 2024 federal unemployment FUTA tax rate is 6% of the first $7,000 of each employee’s wages during the calendar year. The tax only applies to this first $7,000. For any amount of wages exceeding $7,000, the FUTA tax doesn’t apply.

Furthermore, employers who pay state unemployment taxes will likely be eligible for up to a 5.4% federal tax credit. This credit can be applied to the FUTA tax, effectively reducing the FUTA tax rate to as low as 0.6%.

This tax rate rarely changes and has only increased three times in over 80 years. Here’s how the net FUTA tax rate has changed since 1939:

1939	0.3%
1965	0.4%
1970	0.5%
1983	0.6%

FUTA vs. SUTA Taxes

FUTA stands for Federal Unemployment Tax Act, while SUTA stands for State Unemployment Tax Act. SUTA tax liabilities depend on the state and can range from 2% to 5% of employee wages. While FUTA works on a federal level, SUTA pays directly into each state’s unemployment fund. 

When employers pay SUTA taxes, they become eligible for a tax credit of up to 5.4% that can be applied to FUTA taxes. 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 this credit when they report FUTA taxes.

SUTA taxes can vary depending on which state the business is in, as well as the employer’s industry and their layoff history. For example, government employers, nonprofit religious, educational, and charitable organizations (NPOs), and businesses with few employees may be exempt from SUTA, depending on the state laws. In Alaska, Pennsylvania, and New Jersey, employees must also contribute to SUTA alongside their employers. 

How to Calculate FUTA 

How is FUTA calculated? Use this simple formula to calculate FUTA tax, if all employees at your company earn more than $7,000 per year:

FUTA liability = Employee eligible wages x 6%

[$7,000 (applicable employee wages) x number of employees] x 0.06 ( 6% FUTA tax rate) 

If you have some employees earning less than $7,000 in a calendar year, the calculation will have an extra step, as you’ll need to calculate the liability for each employee earning under $7,000 individually. 

For example, if you have 30 employees who all earn over the maximum FUTA taxable amount of $7,000 per year, use the simple calculation:

$7,000 x 20 x 0.06 = $8,400

If you have 20 employees earning over $7,000, one earning $6,500, and two earning $6,000, your calculations will be as follows. 

FUTA liability = [($7,000 x 20) x 0.06] + [($6,500 x 1) x 0.06] + [(6,000 x 2) x 0.06] 

FUTA liability = $8,400 + $390 + $720

FUTA liability = $9510

This amount excludes any exemptions like fringe benefits or pension contributions. In addition, the company can deduct any tax credits granted after paying state unemployment taxes. If the company has already paid state unemployment taxes, it may be eligible for a tax credit of up to 5.4%.

How Do You File and Pay FUTA Taxes?

Most businesses are required to pay their Federal Unemployment Tax Act (FUTA) tax deposits using EFT (electronic funds transfer) every calendar quarter unless their liability owing is less than $500. The dates are as follows:

Quarter	Calendar Months	Due Date
Q1	January to March	April 30
Q2	April to June	July 31
Q3	July to September	October 31
Q4	October to December	January 31

Businesses must file Form 940 annually, by January 31st, unless the employer has deposited all FUTA tax when due each quarter, in which case they have until February 10 to file. 3irs.gov. “Topic no. 759, Form 940, Employers Annual Federal Unemployment (FUTA) Tax Return – filing and deposit requirements” Accessed Aug 23, 2024.

Completing and filing Form 940 can be done online. Just download the current PDF version on the IRS website 4irs.gov. “About Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return” Accessed Aug 23, 2024., edit the document, and then send it in electronically. You may also print the form and fill it in by hand if you prefer.

If you file late, or incorrectly, you’ll receive a letter from the IRS, and you’ll face penalties 5irs.gov. “Failure to Deposit Penalty” Accessed Aug 23, 2024. varying depending on the number of days the deposit is late. The penalty schedule is as follows:

Number of Days the Deposit is Late	Penalty Amount
1-5 calendar days	2% of the unpaid deposit
6-15 calendar days	5% of the unpaid deposit
More than 15 calendar days	10% of the unpaid deposit
More than 10 calendar days after receiving your first notice or letter from the IRS	15% of the unpaid deposit

The IRS also charges interest 6irs.gov. “Interest” Accessed Aug 23, 2024. on penalties, which increases the amount owed until you pay the balance in full.

FUTA vs. FICA

While FUTA and FICA are both federal government tax laws that mandate funding for government programs, they’re fundamentally different. FUTA is a federal tax liability paid by the employer to fund federal unemployment programs, and FICA is a payroll tax, which is paid by both the employee and the employer to pay for social services like Medicare and Social Security. 

FICA taxes are a payroll tax withheld from employee paychecks, and employers are required to then pay a matching amount. Currently in 2024, for Social Security, the percentage is 6.2% up to a wage cap of $168,600, and for Medicare, it’s 1.45%. 

For example, if an employee earned $170,000, the business would calculate FUTA taxes by using the formula:

FUTA liability = $7,000 x 1 x 0.06

FUTA liability = $420 

Note that this is all employer-paid, and not deducted from the employee’s paycheck.

For FICA, you would need to calculate the Social Security and Medicare amounts to deduct from the employee’s paycheck as follows:

Social Security = $168,600 (wage cap) x 6.2% = $10, 453.20

Medicare = $170,000 x 1.45% = $2465

Remember, employers must also match and pay FICA amounts. 

Payments Exempt From FUTA Tax

Only some payments are included in the Federal Unemployment Tax Act. The exempted forms of payment include the following.

Fringe Benefits

This includes employer contributions to health plans and employee accident coverage. It also refers to employer reimbursements for qualified expenses like meals, lodging, or moving.

Group Term Life Insurance

Employer payments toward group term life insurance are exempted from inclusion in the FUTA tax.

Pension Contributions

Suppose an employer contributes to an employee’s qualified plan, such as the SIMPLE IRA or 401(k) plan. In that case, those contributions are exempt from the FUTA tax.

Dependent Care

Payments going to dependent care are exempt from the FUTA tax, up to $500 per employee. For married couples filing separately, the limit is $2,500.

Other Payments

In addition, various exempt payments include:

• Worker’s compensation payments due to sickness or work-related injuries
• Non-cash payments and some types of cash payments to H-2A Visa holders for agricultural labor
• Payments to a spouse, parent, or child under 21 years for business-related services
• Payments to non-employees if they are classified as your employees according to the state unemployment agency

Accurate FUTA Tax Filing Made Easy with FreshBooks Payroll

If you’re a business owner with employees, it’s imperative to calculate your FUTA taxes accurately and pay them on time, along with other payroll taxes like FICA taxes. Using robust payroll software like FreshBooks Payroll powered by Gusto, will help you stay compliant with all federal and state tax laws. FreshBooks streamlines payroll management by automatically calculating and withholding federal taxes. It’s easy to use and improves efficiency in managing various payroll tasks. 

If you’re interested in trying FreshBooks’ all-in-one accounting software, you can try FreshBooks for free today. Let FreshBooks make life simpler for you, so you can focus on running your business effectively. 

FAQs on How to Calculate FUTA tax

The following are some frequently asked questions about what FUTA is, how it works, and how to stay on top of your federal tax liability to the IRS. 

What is an example of a FUTA tax?

FUTA is a federal law that imposes taxes that employers must pay, on top of payroll taxes and federal income tax. Any business with one or more employees has to pay a 6% tax on the first $7,000 each employee earns. For example, if a business pays an employee $10,000 in one year, they’ll owe the IRS $420 in FUTA.

Is FUTA tax not deducted from the employee’s paycheck?

No, in most states FUTA tax is not deducted from the employee’s paycheck. Rather, it is the employer’s tax liability. 

Is FUTA tax deductible?

Because FUTA taxes are employer-paid only, they are considered a payroll expense for the organization. 

How often do you pay FUTA tax?

FUTA tax must be paid at least once a year but is usually paid quarterly. If you owe $500 or more, it must be remitted by the end of that quarter, but if you owe less than $500 the amount can be rolled over into the next quarter, or until it reaches $500. Regardless, the balance owed must be paid at the end of the year.

Do self-employed individuals pay FUTA?

No, self-employed people who are not receiving a W2 don’t pay FUTA, as it’s a tax that only applies to employees on a company’s payroll. Similarly, businesses are also not required to pay FUTA on compensation paid to independent contractors.

What tax documents are required to pay FUTA?

You must submit Form 940 to the IRS if you pay employees who aren’t household workers or agricultural employees, you’ve paid $1,500 in annual wages to employees, or if you’ve had employees working for you for 20 weeks of a calendar year because you owe FUTA taxes to the Internal Revenue Service.

Article Sources:

1. irs.gov. “Federal unemployment tax” Accessed Aug 23, 2024.
2. oui.doleta.gov. “FUTA Credit Reductions” Accessed Aug 23, 2024.
3. irs.gov. “Topic no. 759, Form 940, Employers Annual Federal Unemployment (FUTA) Tax Return – filing and deposit requirements” Accessed Aug 23, 2024.
4. irs.gov. “About Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return” Accessed Aug 23, 2024.
5. irs.gov. “Failure to Deposit Penalty” Accessed Aug 23, 2024.
6. irs.gov. “Interest” Accessed Aug 23, 2024.

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