FUTA: A Comprehensive Guide

FUTA, or Federal Unemployment Tax Act, is a Federal law that requires employers to pay taxes to fund the Unemployment Insurance Program for workers. The program helps workers who are unemployed through no fault of their own. In this guide, we’ll discuss what kind of employers must pay FUTA taxes, who is covered under FUTA, and how much employers must pay.

Who Must Pay FUTA Taxes?

Under FUTA, employers who are required to pay state unemployment tax must pay FUTA. This includes most businesses that have at least one employee or have employees who earned $1,500 or more in any calendar quarter during the current or immediately preceding year. In addition, interstate commerce employers must pay FUTA.

For FUTA purposes, an employee is someone who provides service or labor to you and who receives cash or in-kind wages in return. This includes part-time, full-time and temporary workers. Generally, independent contractors are not considered employees and do not need to be included in the FUTA tax.

Who Is Covered Under FUTA?

FUTA covers employees who work in any of the 50 U.S. states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. It also covers workers employed in all foreign countries in which a U.S. contract requires the use of U.S.-based labor. In addition, FUTA covers certain American Indians employed on or near a reservation and agricultural workers who are employed on a farm or forestry activity.

How Much Must Employers Pay?

Under FUTA, employers must pay a 6.2% tax on the wages of all employees, up to $7,000 of each employee’s wages per year. This tax rate is subject to changes over time. Currently, the maximum amount an employer must pay in FUTA is $434 per employee per year ($7,000 x 6.2%).

However, employers are allowed to deduct a credit against their FUTA tax of up to 5.4%, reducing their FUTA tax rate to 0.8 percent. This credit is available to employers who paid the required amount of state unemployment taxes on time.

Conclusion

FUTA is a federal law that requires employers to pay taxes to fund the Unemployment Insurance Program for workers. Employers who are required to pay state unemployment tax must pay FUTA, as well as interstate commerce employers. FUTA covers employees who work in any of the 50 U.S. states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, and certain American Indians employed on or near a reservation. Employers must pay a 6.2% tax on the wages of all employees, up to $7,000 of each employee’s wages per year. This tax rate can be reduced to 0.8% with the 5.4% credit available to employers who paid the required amount of state unemployment taxes on time.