Federal Unemployment Tax Act (FUTA)

What Is FUTA Payroll Tax?

The Federal Unemployment Tax Act, or FUTA, is a federal law stipulating that employers must pay payroll taxes for their employees.

Who Must Pay FUTA Tax?

Generally speaking, most employers will need to pay FUTA taxes, and it’s against the law for the amount of the tax to be withheld from an employee. All employees must be counted when calculating the tax, including part-time and full-time. Independent contractors and other non-employee workers do not count.

The specific requirements for employers paying this tax are that:

  • They must pay the tax if the employee has been paid at least $1500 in any given quarter
  • They must pay the tax if they employed at least one employee for part of a day for at least 20 weeks in any given year

Who Is Exempt from Paying FUTA?

The IRS stipulates various exemptions from the FUTA tax, which can be found in the instructions for Form 940. The most basic exemption is businesses that do not meet the above criteria.

There are also additional exemptions for employers of household employees, agricultural employers, Indian tribal governments, tax-exempt organizations, and state or local government employers based on different criteria.

How to Calculate the Cut-Off Mark for FUTA

When calculating the FUTA cut-off mark, there are a few things you need to take into consideration:

  • An employer only has to pay FUTA tax on employees’ first $7000
  • The tax rate for FUTA is 6%
  • An employer is allowed a credit of no more than 5.4% for FUTA tax (based on how much is contributed to state unemployment funds)

It then becomes a simple formula of multiplying each of your employees’ wages that have been paid (up to the $7000) by 0.6%. Once you have each of these individual totals, you simply need to add them together.


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