Unemployment insurance programs are administered by each of the various states. The states assess a payroll tax on employers to pay for ongoing and future unemployment claims. In addition to the state tax, most employers are also subject to a smaller federal unemployment tax on their payroll.
Each state unemployment program is interrelated to the federal unemployment program. Employers file a separate tax return to report their federal unemployment tax, also known as FUTA. The FUTA assessment is paid entirely by the employer, so there is no requirement to withhold unemployment tax from employee wages.
FUTA is reported annually on IRS Form 940. Even though Form 940 is filed after the year-end, federal tax deposits may be required on a quarterly basis. Employers with a smaller FUTA assessment may be able to submit their entire tax amount with Form 940. Before determining your FUTA deposit requirements, it is essential to understand the relationship between the federal and state tax rates.
If you have employees, only the first $7,000 paid to each worker during the year is subject to FUTA tax. The federal tax rate is 6 percent, but you can usually reduce that by taking a credit for 5.4 percent of the taxable wages. The credit is for your state unemployment tax paid. This leaves an effective FUTA rate of 0.6 percent for most employers. However, the state interrelatedness may require a credit rate reduction for certain employers.
FUTA credit rate adjustment
In the aftermath of the economic recession of a decade ago, many states received financial infusions from the federal unemployment program. As a result, the credit for state unemployment tax was reduced for employers in certain states. The U.S. Department of Labor maintains a list of states affected by the FUTA credit reduction. As of July 2018, only one state and one U.S. territory were on the list.
FUTA deposit requirements
If your FUTA tax liability exceeds $500 in any quarter, a deposit for that quarter is required. Accrued FUTA tax of $500 or less can be carried over to the next quarter in the year. A quarterly deposit is not required until the accumulated FUTA tax is greater than $500. Accumulated FUTA of $500 or less in the fourth quarter can be paid with Form 940, instead of deposited.
Most organizations with a tax-exempt status are not subject to FUTA tax. State governments and municipalities are also exempt from FUTA tax. Agricultural businesses have some special considerations in regard to FUTA. Contact an accountant to learn about the advantages of relying on a professional payroll service. Contact a service, like The Callen Accounting Group, PLLC, for more help.