A program was created by the Federal Unemployment Tax Act (FUTA) to help state government pay terminated workers unemployment benefits. Employers that pay wages of $1,500 or more annually have to pay these taxes.
Understanding the Basics of FUTA
FUTA is a tax paid only by employers as workers do not pay it, neither is it removed from their paycheck. This tax applies to the first $7000 USD of each worker's wage.
Self-employed folks do not have to pay FUTA tax. With this, partners will not have to worry about FUTA on the distributive part of their profit. Also, if your business involves working with independent contractors, payments to them will not include FUTA.
The FUTA rate is set at 6%, although there might be a credit issued for the state unemployment tax placed at 5.4%. With this, the net federal tax rate comes down to 0.6%. When you apply this rate to the first $7000 wages of every worker, there will be a tax of $42 per employee.
FUTA and FICA: Any Difference?
There is a distinct difference between FICA and FUTA. FICA is a tax paid both by workers and employees to provide Medicare and Social Security benefits. FICA's tax rate is set at 6.2% on compensation that can be taxed up to a fixed amount every year. The employer and employee pay the same amount.
For a worker that earns $46,000 for instance, the employer will pay a FICA tax of $3,519 (6.2% of $46,000 + 1.45% of $46,000). The worker also pays the same tax, which the employer withholds from their salary.
Reporting and Payment of FUTA
While FUTA payment is made annually, the employer needs to deposit the tax annually if the amount exceeds $500 USD for each quarter. Specifically, a FUTA tax liability of over $500 for a calendar year should have at least a quarter deposit payment. With a FUTA tax of $500 or less in a quarter, the employer can continuously forward it to the next quarter until it rises over the $500 threshold.
Payments are made using the Electronic Federal Tax Payment System. However, employers who didn't exceed the $500 threshold can pay it alongside their annual FUTA tax return.
Employers need Form 940 to report the tax. Here are the conditions to file the tax:
There was a $1,500 payment to workers in a calendar quarter in the present or past year.
Your firm involves one worker for at least or some sections in a day. This is in any 20 weeks or more period for the previous or present year.
A different set of rules binds workers in the agricultural fields. Form 943 has more instructions.
By the ending of Jan of the year after year in question (for instance, 31-01-2019 for 2018 tax year), form 940 must be filed.
Returns can be sent in via mail or by using the e-filing system. Make sure to contact a tax professional If you are unsure how to file, calculate, or observe your FUTA obligations.
FUTA Rate For 2020 Tax Year
The FUTA rate has been consistent thus far. Since it is in line with past years, employers need to keep back 6% of the maiden $7,000 of an employee's wages. The state tax rate of 5.4% also remains the same.
Firms must keep withholding the FUTA tax as long as they have paid $1,500 or above in wages in any quarter of the year – 2020 or 2019 also if they have paid their workers for a part of the day in any given 20 weeks in either year.
With the CARES Act developed, there is an extension of the payment deadline for the employer's share of the Social Security taxes for 2020. The deadline for FUTA, however, remains the same as the next due date is July 31. It is mandatory to deposit FUTA withheld during this period during the last quarter of 2020, provided it is above $500.
From the CARES act, there is an employee Retention Credit that pays wages to their workers that couldn't work during the pandemic. This credit is directed to Social Security Tax first, and the excess will be sent as a refund to employers.
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