Ultimate Guide to Understanding the Federal Unemployment Tax Act
In the US, small business owners have many business tax obligations including federal and state unemployment taxes. Two main Acts govern federal and state unemployment taxes. These are the Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA). The Federal Unemployment Tax Act funds unemployment compensation for employees who unexpectedly lose their jobs. On the other hand, SUTA serves the same purpose in each state. Notably, most businesses regardless of the State of establishment have to pay both FUTA and SUTA taxes.
What is the Federal Unemployment Tax Act?
FUTA is a payroll tax that businesses must pay annually or quarterly to fund unemployment benefits for employees who lose their jobs. The business accountant should report this tax on IRS form 940. Typically, the FUTA rate for most businesses is 0.6% of the first $7,000 of wages. Besides, businesses have to comply with their state’s State Unemployment Tax Act (SUTA) that coordinates with the federal tax.
For a business owner in the US, it is crucial to comprehend your FUTA and SUTA tax obligations. That will help you to avoid fines as well as keeping your tax rates low. Read on to find out who has to pay federal and state unemployment taxes, 2019 FUTA and SUTA tax rates. We also have details on when and how to file and pay unemployment taxes.
Who should Pay Federal and State Unemployment Taxes?
Unemployment insurance aims to give payments to employees who are laid off or lose their jobs suddenly. The funds for unemployment insurance payments come from employer-paid federal and state unemployment taxes. Employees do not pay unemployment taxes. This is unlike the Social Security and Medicare payroll taxes, which are divided evenly between employers and employees. Employers in the US do not withhold these taxes from their employees’ paychecks.
The federal government and state governments collect unemployment taxes from employers on an annual basis. After collection, the federal government shares its portion with the states to supplement what the states collect. Businesses that fall between the following criteria must pay FUTA taxes.
If a business paid employees at least $1,500 in wages in a calendar quarter during the current or previous year,
A business employed one or more workers for at least a day in the current or previous year. Note that full-time, part-time, and seasonal W-2 employees count. However, do not consider independent contractors.
2019 FUTA and SUTA Tax Rates
The IRS calculates FUTA and SUTA tax rates based on the amount of an employee’s wages up to a certain limit. Nevertheless, the rates and wage limits can change periodically. It is worth to note that the wage base and rates for FUTA have not increased for quite a while. Even though there is nothing definitive right now, there are discussions that would reinstate sometime in the future.
Filing and Paying Unemployment Taxes
The IRS Form 940, used to report FUTA taxes, is due by January 31 of each year. If this day falls on a weekend, the form should be filed the next business day. All the same, the due date for filing Form 940 and the due date for paying the taxes are different. For instance, if you pay your taxes on time, the deadline for filing Form 940 extends to the second Monday in February.
A common mistake that employers make is thinking that FUTA requires an annual filing. Sometimes, employers mistake their payment liability and may assume that the payment is always due with the filing. However, once an employer’s liability reaches $500, they are required to submit the tax on a quarterly basis. It is essential to note that you could incur penalties for failure to pay tax in time.
If your total FUTA tax liability is more than $500 annually, you must deposit your taxes on a quarterly basis. In case the tax liability is less than $500, you should roll over that amount to the next quarter. When the FUTA tax liability reaches $500, you should deposit your payment no later than the last day of the following quarter.
First quarter (Jan. 1 to March 31): Payment due by April 30
Second quarter (April 1 to June 30): Payment due by July 31
Third quarter (July 1 to Sept. 30): Payment due by Oct. 31
Fourth quarter (Oct. 1 to Dec. 31): Payment due by Jan. 30
Note that you should make payments on the electronic federal tax payment system (EFTPS).
If you have questions regarding FUTA and SUTA taxes, feel free to contact us. Our experts will be relentless to ensure that you get the information you need.
