Small business owners carry a lot of responsibility on their shoulders. You may be in charge of hiring and training the right employees or setting the vision for your brand. Your duties might include payroll, monitoring your business credit reports, and managing your business credit scores, just to name a few. And then, of course, there’s employment taxes and payroll taxes.
The long-term success of your business depends in part on your ability to pay your taxes on time, or to hire someone reliable to help make sure your business meets this crucial obligation. Paying taxes, including federal income tax, social security tax, and Medicare tax, is an obligation you’ll need to fulfill again and again — often on a monthly, quarterly, and yearly basis.
FUTA is an employment tax you need to understand, and pay on time if required. In this guide, we break down what FUTA means, why the tax is required, and how to calculate and pay it.
What Is FUTA Tax?
FUTA, the Federal Unemployment Tax Act, is a federal law that requires employers to pay unemployment taxes. These taxes fund the federal government’s oversight of the unemployment program in all 50 states. Typically, only employers (not employees) pay FUTA taxes. You must manage FUTA taxes in two ways — deposit the tax each quarter and file an annual form.
FUTA Tax Rate 2022: How Much Are FUTA Taxes?
For 2022, the FUTA tax rate is 6%, per the IRS. The FUTA tax applies to the first $7,000 in wages you pay an employee throughout the calendar year. This $7,000 is known as the taxable wage base.
FUTA Vs SUTA
It’s worth noting that you’ll also need to pay SUTA taxes (thanks to the State Unemployment Tax Act) for your employees as well. FUTA is federal and SUTA is state. However, FUTA and SUTA tax rates and wage base amounts may not be the same. (Check with your individual state taxing authority for details about your SUTA rate and wage base requirements.)
FUTA Tax Credit
The maximum FUTA credit is 5.4%. If you’re eligible for the maximum credit, it means your remaining tax rate will only be 0.6%.
Your business will generally be able to claim the maximum 5.4% credit if it can satisfy both of the eligibility requirements below:
- Your company paid its state unemployment insurance taxes on time (and in full).
- The state where your business files taxes is not a credit reduction state.
Credit Reduction States
Sometimes states need to borrow money from the federal government to pay unemployment benefits. Specifically, the states borrow funds from the Federal Unemployment Trust Fund.
A FUTA credit reduction state is a state that borrowed money from the trust fund but failed to repay those funds by their due date. When this happens, the Department of Labor generally steps in and names the state a credit reduction state for FUTA taxes.
If you live in a credit reduction state, you might not be eligible for the full credit against your FUTA tax rate. The result is that you could have to pay more unemployment taxes for each employee until your state repays its loan.
When Are FUTA Taxes Due?
In most states, you don’t collect or withhold the FUTA tax from your employees wages like you do with income tax withholding. Instead, FUTA tax is something that your business is responsible for paying as an employer.
You must pay FUTA taxes for your employees four times per year. The chart below shows when your FUTA taxes are due.
- Quarter 1 (January 1–March 31): Payment is due by April 30
- Quarter 2 (April 1–June 30): Payment is due by July 31
- Quarter 3 (July 1–September 30): Payment is due by October 31
- Quarter 4 (October 1–December 31): Payment is due by January 31
The calendar quarter dates on the left represent the pay period during which your employee received wages. The due dates on the right show when you need to deposit FUTA taxes, along with any income tax withheld for employees, with the federal government.
However, you can carry over your FUTA tax liability to the next quarter if it is less than $500. Once your FUTA tax liability for a quarter (including any FUTA tax carried forward from an earlier quarter), is more than $500, you must deposit the tax by electronic funds transfer using the Electronic Federal Tax Payment System (EFTPS). (In years where there are credit reduction states, you must include liabilities owed for credit reduction with your fourth quarter deposit.)
How to Report FUTA Taxes
Does your business have employees? If so, you may need to file an annual Federal Unemployment Tax Act report. To report your FUTA tax, you need to download and fill out IRS Form 940. For the 2022 tax year, you will file Form 940 no later than January 31, 2023.
Who Needs to File a 940 Form?
Per the IRS, the majority of employers must pay federal (FUTA) and state unemployment taxes. Yet some businesses are exempt from FUTA (at least for certain employees). You can determine whether you’re required to pay FUTA tax using three tests — the general test, the household employee test, and the farmworkers test.
If you want to learn more about the household employees and farmworkers tests, check out Chapter 14 of the IRS Employer’s Tax Guide. Below are some highlights pertaining to the general FUTA test.
You must file a Form 940 and pay FUTA tax (on non-household employees or farmworkers) in 2022 for employees who aren’t if your business satisfies any of the following criteria:
- You paid wages of $1,500 or more in any calendar quarter in 2021 or 2022, or
- You had one or more employees for at least some part of a day in any 20 or more different weeks in 2021 or 20 or more different weeks in 2022. Note:
- The 20 weeks don’t have to be consecutive.
- Employees who worked any part of a day count.
- Temporary, part-time, and full-time employees count.
- Self-employed individuals aren’t typically subject to FUTA.
- Partners don’t count if your business is a legal partnership that files IRS Form 1065.
- Shareholders and corporate officers in S corporations, aka businesses that file IRS Form 2553, may be subject to FUTA.
How to Calculate FUTA
Let’s assume you do owe the FUTA tax (6%) and, like many businesses, you’re eligible for the maximum credit reduction of 5.4%. Your FUTA tax liability after the credit will be 0.6% of the first $7,000 each employee earns.
Here’s a breakdown of how to calculate your quarterly FUTA liability in this scenario:
- Add up the wages paid during the reporting period to your employees who are subject to FUTA tax.
- $7,000 (John) + $2,000 (Paul) + $4,000 (George) = $13,000 Wages Earned Q1
- Multiply the quarterly wages of your employees who are subject to FUTA tax by 0.006. (This figure assumes you’re eligible for the maximum credit of 5.4%.
- $13,000 X 0.006 = $78 FUTA Liability for Q1
As mentioned before, the IRS allows you to carry over your FUTA payment to the next quarter if your FUTA tax is $500 or less. So, in the example above, you wouldn’t need to make a FUTA deposit yet.
Can Form 940 be extended?
January 31 is the due date for filing Form 940. However, if you deposited all FUTA tax when due, you have until February 10 to file. If the due date for filing a return falls on a Saturday, Sunday, or legal holiday, you may file the return on the next business day. You can request an extension of up to 90 days in writing; however, this is an extension to file the form and it is not an extension of the time to pay the tax due.
Final Word: FUTA Taxes 2022
As a small business owner, there are likely parts of your work that you love and certain obligations you’d rather avoid. Yet love them or hate them, employment taxes and payroll taxes aren’t something you can afford to ignore.
For very small businesses at least, it shouldn’t be too complicated to calculate FUTA taxes. Yet if you feel overwhelmed or too busy to manage state and federal employment taxes on your own, you can always hire a professional accountant or bookkeeper to help. Although there’s a cost associated with these services, you could pay a much higher price if you don’t handle your taxes the right way.