Small business owners carry a lot of responsibility on their shoulders. If your business has employees, payroll is one of your most important financial obligations. One of the important payroll taxes you may need to pay is FUTA tax.
In this guide, we break down what FUTA means, when your business must pay it and tips to make sure it’s done properly.
What Is FUTA Tax?
The Federal Unemployment Tax Act (FUTA), 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. You don’t collect or deduct FUTA from employee wages.
You must manage FUTA taxes in two ways — deposit the tax each quarter (if required) and file an annual form.
FUTA Tax Rate 2023: How Much Are FUTA Taxes?
The FUTA tax rate for 2022 and 2023 is 6%. 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.
However, many employers receive a credit of 5.4% because they have paid state unemployment tax (SUTA) taxes on time. This results in a net FUTA tax rate of .06%.
In some states the credit is reduced because of funds the state borrowed from the federal government, and there are other factors that may reduce the credit, discussed below under exemptions.
FUTA Vs SUTA
Most employers must also pay SUTA taxes (thanks to the State Unemployment Tax Act). 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 in any state where you pay employee wages for details about SUTA rate and wage base requirements.)
FUTA Tax Credit
Your business will generally be able to claim the 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.
There are exceptions discussed below, under exemptions.
Credit Reduction States
Sometimes states need to borrow money from the federal government to pay unemployment benefits. (This was especially true during the pandemic.) 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 the due date. When this happens, the Department of Labor generally steps in and names the state a credit reduction state for FUTA taxes.
If a business pays wages subject to unemployment tax in a credit reduction state, your business may not be eligible for the full credit against your FUTA tax rate. The result is that your business may have to pay more unemployment taxes for each employee until your state repays its loan balance.
Credit reduction rates for 2022 are:
- California, Connecticut, Illinois, and New York: 0.003 (0.3%).
- U.S. Virgin Islands is 0.036 (3.6%).
Use Schedule A Form 940 to calculate and report Multi-State Employer and Credit Reduction Information to the IRS.
FICA vs FUTA
FICA taxes are also based on payroll, but are a different tax. The Federal Income Contributions Act (FICA) is the federal law that created the payroll tax that funds Social Security and Medicare.
How to Pay and Report FUTA Taxes
If your business is required to pay FUTA tax, you will pay FUTA taxes quarterly (unless the amount is less than $500, see below) plus you’ll file an annual Federal Unemployment Tax Act report using IRS Form 940. For the 2022 tax year, you must file Form 940 no later than January 31, 2023 unless you deposited all FUTA tax when due, in which case you have until February 10, 2022 to file Form 940.
- 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 credit reduction states apply, you must include liabilities owed for credit reduction with your fourth quarter deposit.)
FUTA Tax Requirements
Generally you must file a Form 940 and pay FUTA tax (on non-household employees or farmworkers) for 2022 for employees if you answer “yes” to either of these questions (referred to as the “general 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.
There are some exemptions, as we will discuss next.
FUTA Tax Exemptions
Some businesses are exempt from FUTA, at least for certain employees. Exceptions include employers of household employees, agricultural employers, Indian tribe governments, tax-exempt organizations, and state and local government employers.
To learn more about the household employees and farmworkers tests, and exceptions for other employees, check out Chapter 14 of the IRS Employer’s Tax Guide.
Also some fringe benefits may be subject to FUTA tax, while others are exempt – either in part or in full. In 2022, for example, moving expenses and bicycle commuting reimbursements are subject to FUTA tax. (The Tax Cuts and Jobs Act suspended their exclusion.) Adoption assistance benefits are not currently exempt from FUTA, while dependent care assistance is exempt up to limits, currently up to $5,000 ($2,500 for married employees filing separate returns). The IRS publishes details of the taxability of fringe benefits in Publication 15-B (2023), Employer’s Tax Guide to Fringe Benefits.
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.
However, there are additional factors that may affect the FUTA tax calculation.
If some or part of those employee wages are paid wages in credit states, then you will not receive the maximum credit.
In the above example, if John is paid wages in a credit reduction state— let’s say New York— the employer will not get the full 5.4% credit on his wages for 2022.
Another factor is credit for state unemployment tax paid to a state unemployment fund. Employers typically get a credit for amounts paid to a state unemployment fund by January 31, 2023 (or February 10, 2023, if your Form 940 is due then). States include the District of Columbia, Puerto Rico, and the U.S. Virgin Islands.
State unemployment taxes are sometimes called “contributions” and refer to payments employers are required to make to state unemployment funds. The employer may receive an additional credit if it has an experience rate lower than 5.4% (0.054). The employer’s experience rate refers to a calculation that is used by the state to help determine how much the employer must pay in SUTA tax based on their experience with previous employees. New employers are charged SUTA tax at the new employer rate (varying by state). But after a period of time (again, varying by state), the rate will be re-evaluated, and employers who have had higher unemployment claims will be charged more.
Back to the FUTA Tax calculation. Employers with a state experience rate lower than 5.4% (0.054) may receive an additional credit.
And there’s one more wrinkle to consider. In some states, wages paid to corporate officers or payments for fringe benefits may not be subject to SUTA tax, but may be subject to FUTA. In those cases, the employer may be liable for FUTA tax at the maximum rate of 6.0%.
There’s a lot to consider here when calculating FUTA tax. If it seems complicated (and it can be) you may want to work with an accounting professional, use accounting software that includes payroll (including FUTA), or use a payroll services company that includes FUTA and SUTA tax management.
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.
Form 940 for 2023: Employer’s Annual Federal Unemployment (FUTA) Tax Return
The due date for the 2023 Form 940 will likely be the same as 2022, though the 2023 Form 940 is not yet available from the IRS. The credit reduction states for 2023 will be announced November 10, 2023. You can view historical and current credit reduction states information at DOL.gov.
Final Word: FUTA Taxes 2022 & 2023
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 it gets done. You may have to do everything from securing small business loans to setting the vision for your brand. 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 one of those taxes you must make sure you calculate correctly and pay on time.
The good news is that many payroll services can calculate unemployment tax rates and remit unemployment taxes, as well as prepare and file Form 940, for employers. They not only make managing payroll easier, they can also make handling these crucial taxes easier as well.
This article was originally written on January 3, 2020 and updated on February 2, 2023.