The Federal Unemployment Tax Act (FUTA), with state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs. Most employers pay both a federal and a state unemployment tax. A list of state unemployment agencies, including addresses and phone numbers, is available in the Instructions for Form 940. Only the employer pays FUTA tax; it is not withheld from the employee’s wages.
Services rendered after December 20, 2000, to a federally recognized Indian tribal government (or any subdivision, subsidiary, or business wholly owned by such an Indian tribe) are exempt from FUTA tax, subject to the tribe’s compliance with state law. For more information, see Internal Revenue Code section 3309(d).
Who must pay?
Use the following three tests to determine whether you must pay FUTA tax. Each test applies to a different category of employee, and each is independent of the others. If a test describes your situation, you are subject to FUTA tax on the wages you pay to employees in that category during the current calendar year.
- General test.
You are subject to FUTA tax in 2011 on the wages you pay employees who are not farmworkers or household workers if:
- You paid wages of $1,500 or more in any calendar quarter in 2010 or 2011, or
- You had one or more employees for at least some part of a day in any 20 or more different weeks in 2010 or 20 or more different weeks in 2011.
- Household employees test.
You are subject to FUTA tax if you paid total cash wages of $1,000 or more to household employees in any calendar quarter in 2010 or 2011. A household employee is an employee who performs household work in a private home, local college club, or local fraternity or sorority chapter.
- Farmworkers test.
You are subject to FUTA tax on the wages you pay to farmworkers if:
- You paid cash wages of $20,000 or more to farmworkers during any calendar quarter in 2010 or 2011, or
- You employed 10 or more farmworkers during at least some part of a day (whether or not at the same time) during any 20 or more different weeks in 2009 or 20 or more different weeks in 2010.
Computing FUTA tax.
Before July 1, 2011, the FUTA tax rate is 6.2%. After June 30, 2011, the FUTA tax rate is scheduled to decrease to 6.0%. The tax applies to the first $7,000 you pay to each employee as wages during the year. The $7,000 is the federal wage base. Your state wage base may be different. Generally, you can take a credit against your FUTA tax for amounts you paid into state unemployment funds. The credit may be as much as 5.4% of FUTA taxable wages. If you are entitled to the maximum 5.4% credit, the FUTA tax rate after credit is 0.8% (0.6% after June 30, 2011). You are entitled to the maximum credit if you paid your state unemployment taxes in full, on time, and on all the same wages as are subject to FUTA tax, and as long as the state is not determined to be a credit reduction state. See the Instructions for Form 940 to determine the credit. In some states, the wages subject to state unemployment tax are the same as the wages subject to FUTA tax. However, certain states exempt some types of wages from state unemployment tax, even though they are subject to FUTA tax (for example, wages paid to corporate officers, certain payments of sick pay by unions, and certain fringe benefits). In such a case, you may be required to deposit more than 0.8% (0.6% after June 30, 2011) FUTA tax on those wages. See the Instructions for Form 940, for further guidance.
If you acquired a business from an employer who was liable for FUTA tax, you may be able to count the wages that employer paid to the employees who continue to work for you when you figure the $7,000 FUTA wage base. See the Instructions for Form 940.
Depositing FUTA tax.
For deposit purposes, figure FUTA tax quarterly. Determine your FUTA tax liability by multiplying the amount of taxable wages paid during the quarter by 0.8% (0.6% after June 30, 2011). Stop depositing FUTA tax on an employee’s wages when he or she reaches $7,000 in taxable wages for the calendar year. If your FUTA tax liability for any calendar quarter is $500 or less, you do not have to deposit the tax. Instead, you may carry it forward and add it to the liability figured in the next quarter to see if you must make a deposit. If your FUTA tax liability for any calendar quarter is over $500 (including any FUTA tax carried forward from an earlier quarter), you must deposit the tax by electronic funds transfer. See section 11
for more information on electronic funds transfer.
You are not required to deposit FUTA taxes for household employees unless you report their wages on Form 941, Form 944, or Form 943. See Publication 926, Household Employer’s Tax Guide, for more information.
When to deposit.
Deposit the FUTA tax by the last day of the first month that follows the end of the quarter. If the due date (below) for making your deposit falls on a Saturday, Sunday, or legal holiday, you may make your deposit on the next business day. If your liability for the fourth quarter (plus any undeposited amount from any earlier quarter) is over $500, deposit the entire amount by the due date of Form 940 (January 31). If it is $500 or less, you can make a deposit, pay the tax with a credit or debit card, or pay the tax with your 2010 Form 940 by January 31. For information on paying your taxes with a credit or debit card, visit the IRS website at www.irs.gov/e-pay
Table 4. When to Deposit FUTA Taxes
|Reporting FUTA tax.
Use Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, to report FUTA tax. File your 2010 Form 940 by January 31, 2011. However, if you deposited all FUTA tax when due, you may file on or before February 10, 2011. If you do not receive Form 940, you can get a form by calling 1-800-TAX-FORM (1-800-829-3676).
If you did not report employment taxes for household employees on Form 941, Form 944, or Form 943, report FUTA tax for these employees on Schedule H (Form 1040), Household Employment Taxes. See Publication 926 for more information. You must have an EIN to file Schedule H (Form 1040).
Electronic filing by reporting agents. Reporting agents filing Forms 940 for groups of taxpayers can file them electronically. See the Reporting Agent discussion in section 7 of Publication 15-A.