The Federal Unemployment Tax Act (FUTA) requires employers to pay a tax of 6% on the first $7,000 of salary or wages paid to each employee during the year. This FUTA tax is deposited with the IRS throughout the year. Employers file Form 940 to calculate their FUTA tax for the previous calendar year.
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Under FUTA, employers pay a tax rate of 6% on the first $7,000 that each employee earns. This tax is paid quarterly. Employers file Form 940 annually by January 31 showing their FUTA tax calculations and payments made in the previous year.
The good news is that the amount you pay to the federal government can be reduced by the amount of unemployment taxes you pay to the state. Paying state unemployment taxes on time can reduce your FUTA taxes by as much as 5.4% percentage points, meaning that you can end up paying a FUTA tax rate as low as 0.6% at the federal level on the first $7,000 that each employee earns.
Regardless of how much FUTA tax you pay, you must file your federal 940 annually to report unemployment tax payments you made to the FUTA fund.
Employers pay federal unemployment tax if they meet one of two tests. The first test measures the amount of wages paid during the current calendar year and the previous year. The second test measures the number of weeks employees worked for an employer during the current year. Even part-time and temporary employees count toward these tests.
If you answer yes to either of the below questions, then you must pay federal unemployment tax and file a federal 940:
· Wages paid test: Did you pay at least $1,500 or more in wages to employees in any calendar quarter during 2018 or 2017?
· Weeks of employment test: Did you have at least one employee or more working for you at least some part of a day in any 20 or more different weeks in 2018?
However, independent contractors are not considered employees. Payments to contractors are not subject to FUTA tax and payments are reported on Form 1099. Be aware that the IRS can audit to make sure you are classifying your workers properly. To learn more, read the FitSmallBusiness guide on the issues to consider when deciding to hire contractors vs. employees.
The FUTA tax rate is 6% on the first $7,000 paid to each employee. Once employee’s wages exceed $7,000, you have no further FUTA tax liability. You’ll also have to pay state unemployment taxes (SUTA). By paying SUTA on time each quarter before FUTA taxes are due, you can reduce your FUTA tax rate to 0.6%.
This is because in all states except for “credit reduction states,” the federal government allows a credit of 5.4% to offset what you pay in state unemployment taxes. This means the maximum FUTA liability for many businesses is $42 per employee ($7,000 x 0.6% = $42). It doesn’t matter what your state tax rate is ― the federal tax credit is the same. However, your SUTA tax might vary depending on your state.
The employer’s annual FUTA tax return, which is IRS Form 940, is due by January 31 of each year to report FUTA tax liability for the previous calendar year. The due date for 2018 FUTA taxes is January 31, 2019. However, employers can file Form 940 by February 11, 2019, as long as their FUTA tax liabilities are paid throughout 2018 by the quarterly payment due dates.
The deadlines for filing Form 940 with the IRS by year are:
|
Calendar Year |
Due Date for Filing Form 940 |
|
2017 |
January 31, 2018 |
|
2018 |
January 31, 2019 |
|
2019 |
January 31, 2020 |
|
2020 |
February 1, 2021 |