The average American contributed almost 30 percent of their income to taxes in 2018.
It’s hard enough to figure out how much money from your paycheck is going to the government. But if you’re a business owner, you have even more to consider. Namely, your corporate holdings will incur taxes, too.
One major payment made by employers is the federal unemployment tax, or the FUTA.
What is the FUTA?
The government charges you for its unemployment purse, which it uses to pay employees who use their jobs involuntarily. Some states may charge a similar fee.
Employers have to pay into this tax themselves. In other words, they can’t deduct the FUTA from the amount they pay their employees.
You’ll figure out your FUTA tax rate with the help of your tax forms, specifically Form 940, from the IRS.
How Do I Know If I Owe FUTA?
Not all businesses have to pay into the FUTA. But you do if you meet either of these criteria:
- You had at least one employee for at least part of a day in at least 20 weeks of the year.
- You paid employees at least $1,500 in at least one quarter in the calendar year.
All types of employees count here: part-time, full-time and even temps. Wages to independent contractors or other types of non-employees won’t incur the FUTA.
How Do I Calculate FUTA?
Now that you know whether or not you have to pay the FUTA, it’s time to figure out the amount you owe.
FUTA tax is simple — it’s a 6 percent tax on the first $7,000 of income you pay to each of your employees. In many cases, you can get a 5.4 percent credit from your state for what you pay them in unemployment tax. That means you only pay 0.6 percent to the federal government.
Not all of what you pay to your employees count toward the FUTA, though. For example, reimbursing your staff for moving or providing them with life insurance benefits doesn’t factor into what you pay in FUTA taxes.
Whatever you owe in FUTA, you’ll want to safeguard in a liability account until it’s time to pay.
When Do I Pay FUTA?
Federal employer tax is slightly different than income tax. With the latter, you typically pay on April 15th, and that’s it.
However, with FUTA, you have to pay a quarterly deposit if your FUTA payment has breached $500 in the designated three-month periods of the year.
The first quarter extends from the start of the year through March 31st. Your FUTA deposit for this period will be due on April 30th.
The second quarter lasts from April 1st until June 30th, with deposits due on July 31st. Then comes the third three-month stretch, from July 1st until September 30th. You’ll owe your deposit for this period on October 31st.
The fourth FUTA quarter spans from October 1st until the end of the year. You’ll pay FUTA for that period by January 31st of the next year.
Keep in mind that liability deposits accrue over periods. So, if you owe $300 in FUTA for the first period, you don’t need to pay a deposit. But if you owe another $300 by period two, you’ll have accrued $600 in FUTA to pay, meaning you owe a deposit.
File the FUTA On Time
Finally, make sure you file your FUTA on time. It’s due on January 31st of the next calendar year. Your tax forms can help you get it done correctly and submit on time.
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