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What is the Federal Unemployment Tax Act (FUTA)?

FUTA (Federal Unemployment Tax Act) is a federal law that generates funds to manage job assistance and unemployment insurance programs in every state. Employers must pay annual or quarterly federal unemployment taxes as required by the Act; these payments are a subset of what is known as payroll taxes.

The money in the account is used to pay people who have lost their jobs unemployment benefits. Despite being based on employees’ wages, the FUTA payroll tax is exclusively levied against employers, not employees. To put it another way, it is not taken out of a worker’s pay. FUTA is distinct from other payroll taxes like Social Security tax in this regard since it affects both businesses and employees.

How is the Federal Unemployment Tax Calculated?

Calculating a company’s FUTA tax obligation is not too difficult. The first $7,000 in payments made to an employee by a company, excluding exempt payments, are subject to FUTA taxes. Employers frequently receive a credit of up to 5.4% against this tax, while the FUTA tax rate for 2021 was 6.0%.

Consider the scenario where Employee A received $10,000 in pay due to FUTA taxes in the first quarter and Employee B received $5,000. Only the first $7,000 in earnings paid to Employee A each quarter are subject to the tax.

The tax liability is as a result:

Employees A and B’s eligible wages multiplied by 6% is the FUTA Liability.

Liability for FUTA equals ($7,000 + $5,000) * $6%

The FUTA tax obligation for the corporation would be $720. Keep in mind that the business might be qualified for a tax credit of $648 ($12,000 * 5.4%); in this instance, it would only owe $72.

How often Must Federal Unemployment Taxes be Calculated?

Quarterly calculations and reports are required for federal unemployment taxes, also referred to as FUTA taxes. Employers must submit Form 940 to the Internal Revenue Service (IRS) on a quarterly basis in order to report and pay FUTA taxes.

The following dates are the deadlines for submitting Form 940 and paying FUTA taxes:

  • The deadline is April 30 for the first quarter (January through March).
  • The deadline is July 31 for the second quarter (April through June).
  • The deadline for the third quarter (July through September) is October 31.
  • The deadline for the fourth quarter (October through December) is January 31 of the subsequent year.
  • To avoid fines and interest costs, employers must calculate and report FUTA taxes on time and precisely.

Also, See: Federal Income Tax

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