Who Pays Federal Unemployment Taxes?
FUTA stands for Federal Unemployment Tax Act. Federal unemployment taxes (FUTA) are an employer-paid tax. FUTA tax is not withheld from an employee's gross pay.
The maximum wage base for computing FUTA tax is the first $7,000 of each employee's gross pay. When an employee's gross pay exceeds $7,000, no FUTA tax is assessed on the excess over $7,000.
For tax year 2016 and 2015, the gross FUTA rate is 6.0% (.06). However, most employers get a maximum credit of up to 5.4% (.054) against the FUTA tax, bringing the effective FUTA rate down to 0.6% (.006).
You're entitled to the maximum credit of up to 5.4% if you paid all state unemployment tax by the due date of your Form 940 or if you were not required to pay state unemployment tax during the calendar year due to your state experience rate. These rules also apply to the District of Columbia, Puerto Rico, and the U.S. Virgin Islands.
When the FUTA Credit May Not Apply
As previously mentioned, most employers get a credit of up to 5.4% against the 6.0% FUTA rate reducing it to .006. However, if any wages subject to FUTA tax are not subject to state unemployment tax, you may be liable for the FUTA tax at the maximum rate of 6.0%.
For example, in certain states, wages paid to corporate officers, certain payments of sick pay by unions, and certain fringe benefits are excluded from state unemployment tax.
State unemployment taxes are sometimes call contributions. These contributions are payments that a state requires employers to make to its unemployment fund for the payment of unemployment benefits. Some states withhold state unemploment taxes from employees' gross pay.
Due Date for Filing Form 940
The due date for filing Form 940 for any year is January 31 of the following year, unless the 31st falls on a weekend. Since January 31, 2016 falls on a Sunday, Form 940 is due February 1, 2016.
Extended Due Date: If you deposited all your FUTA tax when it was due, you may file Form 940 by February 10, 2016. You must make FUTA deposits by the last day of the month following any quarter in which the FUTA tax liability exceeds $500. See When You Must Make FUTA Tax Deposits.
If the IRS receives your return after the due date, it will treat your return as filed on time if the envelope containing your return is properly addressed, contains sufficient postage, and is postmarked by the U.S. Postal Service on or before the due date or sent by an IRS-designated private delivery service on or before the due date.
If you don't follow these guidelines, the IRS will consider your return filed when it is actually received. For a list of IRS-designated private delivery services, see Pub. 15.
State Reporting Number Not Required
You are no longer required to list your state reporting number(s) on Form 940. This is the number assigned to your business when you registered as an employer with your state.
Credit Reduction States
If you live in a credit reduction state, your credit may be reduced.
A state that fails to repay funds borrowed from the federal government to pay unemployment benefits is called a credit reduction state. In these states, the credit used to reduce the gross FUTA rate is reduced.
If you file Form 940 electronically, you can e-file and e-pay via electronic funds withdrawal (EFW) the balance due in a single step using tax preparation software or through a tax professional.
However, do not use EFW to make federal tax deposits. For more information on paying your taxes using EFW, visit the IRS website at www.irs.gov
You may pay your FUTA tax shown on line 14 using a major credit card. However, do not use a credit card to pay taxes that are required to be deposited.
What are FUTA Funds Used For?
FUTA tax combined with state unemployment tax provide funds for paying unemployment compensation to workers who have lost their jobs. Most employers pay both a federal and a state unemployment tax.
Form 940 is used to report your annual Federal Unemployment Tax Act (FUTA) tax.
- Return to the Payroll Taxes Table of Contents to find related links.