What is FUTA Tax?


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The FUTA (Federal Unemployment Tax Act) tax is a federal employer tax that’s used to help fund state workforce agencies. Employers report and pay FUTA taxes separately from Social Security and Medicare taxes, and withholdings.

The money from the FUTA tax, along with state unemployment taxes, is used to pay unemployment compensation to workers who have lost their jobs.

The FUTA tax rate is 6.0%. The tax applies to the first $7,000 employers paid to each employee as wages during the year. However, if employers pay state unemployment taxes, they may be eligible for a credit of up to 5.4% which reduces their FUTA tax.

It’s important to note that only the employer pays FUTA tax; it is not deducted from the employee’s wages.

Please consult the IRS or a tax professional for the most current tax rates and rules.

Example of FUTA Tax

Let’s imagine you own a business and you employ Jane.

Jane’s annual salary is $50,000.

For FUTA, you only pay taxes on the first $7,000 of each employee’s income. So, in Jane’s case, although her salary is $50,000, you’re only considering $7,000 for FUTA tax.

As of 2021, the FUTA tax rate is 6.0%, but if you have paid your state unemployment taxes in full and on time, you are eligible for a tax credit up to 5.4%. This credit reduces your FUTA tax rate to 0.6%.

So, you would calculate Jane’s FUTA tax as follows:

$7,000 (FUTA taxable wages) x 0.6% (FUTA tax rate after credit) = $42

So, in this case, you would pay $42 in FUTA tax for Jane for that year.

Remember, this is a simplified example and actual payroll taxes can get more complicated, particularly when considering different state unemployment taxes and the timeliness of these payments. Therefore, it’s often a good idea to consult with a payroll service or a tax professional.

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