What is FUTA?
FUTA is a federal payroll tax that all employers must pay on their employees’ wages. The collected revenue from this tax contributes to a pool of funds that’s paid to unemployed workers who qualify for unemployment benefits at some point in their working lives.
The federal unemployment tax rate for 2021 is 6% on the first $7,000 that an employee makes with your company each calendar year. After that initial $7,000, you, the employer, are not taxed on employee earnings for the remainder of the year. This means that the maximum amount an employer would pay under FUTA per calendar year is $420 per employee (0.06 x 7000 = 420).
These tax payments are due quarterly, on April 30, July 31, October 31 and January 31 of each year. Failure to pay on time can result in penalties of anywhere from 2% to 15%.
Who pays unemployment taxes in the United States?
Even though this payroll tax is based on employee wages, the employee isn’t responsible for these payments. Unlike Social Security and Medicare, which are payroll taxes an employee may contribute to, unemployment taxes under FUTA are the responsibility of the employer.
As an employer, you’re legally required to pay unemployment taxes under FUTA if you have at least one employee who works a minimum of 20 weeks in a year or if you’ve paid an employee at least $1,500 in a single quarter. According to the IRS, the 20 weeks of work do not have to be consecutive and apply to any full-time, part-time or temporary worker.
You can benefit from a tax credit as an employer
If you, as an employer, pay into your state unemployment insurance as well, you can receive a tax credit that reduces the amount you pay under FUTA. This federal tax credit is up to 5.4%, meaning your federal unemployment tax rate may be as low as 0.6%.
Who is eligible to collect unemployment benefits?
Though employees don’t pay into these benefits under FUTA, they are the ones who ultimately benefit from the ability to collect payments if they become unemployed through no fault of their own. For example, if they’re laid off from a position at your company, they may be eligible to apply for federal unemployment benefits. This doesn’t apply if the employee willingly quits their job without cause.
What is worker misclassification?
Worker misclassification is when an employer wrongly deems a worker as a nonemployee based on their weeks worked per calendar year or their quarterly income. As a result, the employer would not pay the correct amount of tax under the Federal Unemployment Tax Act for that employee and could cause the employee to be unable to receive unemployment benefits they are owed under the Fair Labor Standards Act if they became unemployed in the future.
Worker misclassification can be a genuine mistake, stemming from a misunderstanding of the guidelines set out regarding state and federal employment tax payments. However, it’s sometimes an intentional act and is against the law. If you’re unsure about the status of a worker at your small business, you can complete and file Form SS-8 to have the IRS determine the correct proceedings for federal unemployment taxes and income tax withholding.
Are there exceptions for unemployment tax payments under FUTA?
The guidelines for who must pay these taxes under FUTA differ for those paying cash to domestic (household) workers and for employers of agricultural employees.
Under FUTA, you must pay into the federal unemployment benefits pool if you pay cash to a domestic employee, such as a babysitter or a cleaner, of $1,000 or more in a calendar quarter.
Agricultural employers must contribute to FUTA if they pay wages of $20,000 or more in a calendar quarter or they have 10 or more employees working at least one day a week for 20 weeks in a calendar year. It doesn’t have to be the same 10 employees or 20 consecutive weeks of work.
