What is FUTA?


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FUTA stands for the Federal Unemployment Tax Act. It’s a United States federal law that imposes a payroll tax on both employers and employees to help fund state workforce agencies. Employers report and pay FUTA taxes separately from Social Security and Medicare taxes, and withholdings.

The FUTA tax, along with state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs. The majority of employers pay both a Federal and a state unemployment tax. Only the employer pays FUTA tax; it is not deducted from the employee’s wages.

For 2021, the FUTA tax rate was 6.0%. The tax applies to the first $7,000 you paid to each employee as wages during the year. However, you may be eligible for a credit of up to 5.4% when you file your Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return. This could reduce your FUTA tax to as low as 0.6%.

Example of FUTA

I can provide an example of how to calculate the Federal Unemployment Tax Act (FUTA) tax.

Let’s assume that you have a business and you’ve hired one employee, John.

John’s annual salary is $40,000.

For FUTA, you only pay taxes on the first $7,000 of each employee’s income. So, in John’s case, although his salary is $40,000, you’re only considering $7,000 for FUTA tax.

As of 2021, the FUTA tax rate is 6.0%, but if you are eligible for the maximum state unemployment tax credit of 5.4%, you can reduce the FUTA tax rate to 0.6%.

So, you would calculate John’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 John for that year.

Please remember that this is a simplified example and actual payroll taxes can get more complicated, particularly when considering different credits and state unemployment taxes. Therefore, it’s often a good idea to consult with a payroll service or a tax professional.

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