Posted by Advantage Tax Services, Inc.

Everything You Need To Know About Federal Unemployment Tax

Everything You Need To Know About Federal Unemployment Tax

The Federal Unemployment Tax (FUTA) is a Tax incurred by the employer and it is used for the workforce of state agencies. This tax is reported by every Employer with the filing of Form 940 at the IRS office. Sometimes, employers are expected to make payment in installments during the period of the tax year.

The Tax takes care of the share on the part of the Federal Government, the cost of managing the unemployment insurance and programs relating to job service in every state. It makes provision for about half of the fund needed to maintain unemployment benefits, and state can even borrow if needed to take care of those benefits.

FORM 940

This form is used to determine the annual FUTA of a business. The proceed is used to pay those might have lost their jobs, especially during high unemployment period. Deduction is not done from payroll of employee as it is being paid by the business. The form is expected to be submitted by February ending.

Determining Eligibility for Business

How do you know if your business is eligible to pay Federal Unemployment Tax? There are two requirements that must be met to pay this tax:

  • Your business pay $1500 and above to the employees in any quarter of the business calendar.
  • The business has had more than one employees working in any capacity for a period of twenty weeks of the year at the minimum.

Having met these two requirements, you can then fill the FUTA form.

Determining Eligibility for Workers

Each worker is eligible to pay 6.2% on the first $7000 he/she earned each year. The employer will not be required to pay FUTA on the worker if $7000 has been earned. This circumstance is very complicated. There are many tax credits that an employer can leverage on. In such a situation, the rate calculated is reduced to as low as 0.8%.

Wages exempted from the Federal Unemployment Taxes.

  • Services not rendered on the United States soil.
  • There could be an exemption in a situation where money is earned by an employee after death. The money allocated to the estate of the worker is not subject to FUTA.
  • Payments made by parent to a child of under 21 years of age is exempt from this tax.
  • Wages that are paid from one spouse to the other spouse.
  • Wages paid by International Organization of a foreign government.
  • Wages paid by governmental agency of the United State.
  • Wages paid to interns by hospitals.
  • Employers of distributors of Newspaper under the age of 18 would not be required to pay unemployment tax.
  • School that pays a student is exempted.
  • Non-profit making organizations are also exempted from paying this tax.

How to calculate the Federal Unemployment Taxes

You will need to know the Federal Unemployment taxes payable given the aggregate gross wages you paid to your workers, up to $7000 per worker. This is then multiplied by the total Federal Unemployment tax rate which is currently 0.06%. You are required to complete the Form 940. You can consult a tax preparer or your accountant as you will need to calculate how much you owe in the previous year and how much you have paid. The balance is then submitted by January 31 to the Inland Revenue Service, coupled with the Form 940.

How to Pay FUTA

The taxes are paid every quarter for quarters where you have $500 and above to be paid with respect to the amount set aside from payroll. Unpaid Federal Employment Taxes of above $500 are to be paid on the 30th of April, 31st of July, 31st of October and 31st of January. A deposit is not required for an unpaid FUTA tax that is less than $500 and is carried to the next quarter. 

  • Calculate the Federal Unemployment Taxes per payroll.
  • Send in deposit for any given quarter where your liability is over $500. Payments are made using the Electronic Federal Tax Payment Systemc (EFTPS).
  • You are required to pay FUTA Tax liability of the previous year when you file the yearly unemployment tax report on Form 940.

It may look strenuous to keep up with your tax responsibility, but it is always advisable to hire a tax preparer or an accountant to take care of your tax obligations while you focus on building your business. I hope you find the information shared very useful?

Advantage Tax Services, Inc.
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