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In my last article we continued our series on how to hire and manage employees, with a look at Where To Hire Freelancers For Any Type Of Business.  In today’s article we are going to continue that series, with a look at FUTA & Form 940: What employers need to know.  So let’s get started!

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FUTA  Definition: FUTA stands for Federal Unemployment Tax Act. This law provides the framework for how states run their unemployment benefit programs.

FUTA Tax / FUTA Tax Rates:  Companies must pay taxes to the federal government for unemployment insurance. These taxes help pay for federally mandated benefit extensions, as well as provide an emergency fund for states to tap into when they need temporary help to pay benefits. The maximum FUTA Tax Rate is 6.0%, however, in the practice the effective FUTA tax rate is much lower. Your company will pay a maximum FUTA tax of $105 per employee per year.

940 Form- This is an IRS form which must be submitted annually, in which an employer calculates his/ her FUTA taxes. It’s important to note that while Form 940 is submitted once per year, FUTA tax payments must be made quarterly. Here is the 940 Tax Form for 2013 from the IRS website (the most current form is 2012, which can be used for 2013. When the form is updated the most current version will be found at this same link).

SUTA / SUTA Tax: SUTA stands for State Unemployment Tax Authority. The bulk of Unemployment insurance taxes are paid to state governments. To find out information about your state’s unemployment insurance tax, go here.

Who has to pay FUTA tax?

The short answer is anyone that has employees; the full burden of this tax falls on the employer. The more technical answer is if you paid more than $1,500 in wages in any quarter in the last two years, or had an employee (regardless of the amount of time worked) in 20 different weeks of the year, you’re responsible for paying FUTA tax.

How much is FUTA tax?

The FUTA tax is 6.0% on the first $7,000 of earnings per employee. After $7,000, there is no further FUTA tax. However, if you pay your SUTA taxes, the tax is reduced to 0.6% for most states. Around 20 states owe the federal government money for unemployment benefits, thus companies have less of a reduction. As of 2012, the highest effective rate was 1.5% on the first $7,000. Here are the FUTA Rates By State for 2013.

The FUTA tax hits companies with lots of temporary employees making close to the minimum wage the hardest. On the other hand, if your company has a few highly paid workers, the FUTA tax will not be a significant expense.

Sample Calculations Of FUTA Tax

Company A (annual wages) FUTA Tax (assumes 0.6% Rate) Company B FUTA Tax
$35,000 $42 $4,000 $24
$45,000 $42 $6,000 $36
$47,000 $42 $22,000 $42
$50,000 $42 $23,000 $42
$65,000 $42 $40,000 $42
Total $242,000 $210 Total $95,000 $186

When and how are FUTA Taxes are paid

FUTA taxes must be paid quarterly by the last day of the month following the end of a calendar quarter. For January, February, and March the FUTA tax must be paid by April 30th. The latest quarterly payment dates are April 30th, July 31st, October 31st and January 31st. If you’re a company that has yearlong employees, the majority of your FUTA expenses will be made during the first quarter. (If your FUTA obligation for a quarter is under $500, you don’t need to send in a quarterly payment, but can pay the amount at the end of the year.)

Payments for FUTA taxes must be submitted through the Electronic Federal Tax Payment System (EFTPS). This is not the same as e-file for business which is for submitting tax returns, rather than making payments. To use EFTPS, you will need a Federal Employer Identification Number (aka EIN or FEIN). Apply for an EIN here.

When do you file Form 940 with the IRS?

You must file the 940 form with the IRS by January 31st for the preceding year. Yes, you are calculating and making your FUTA payments quarterly but, only submitting the paperwork once per year. Form 940 can be submitted by mail or electronically. The IRS provides great instructions on how to fill out the form here.

What are the differences between FUTA and SUTA taxes?

  • Each State has different amounts of wages which are taxable. Very few use the federal limit of $7,000.
  • While the federal tax is the same for every business of a particular state, individual companies are taxed differently by the state. The tax that your company pays to the state will be based on the history of your company (with regards to unemployment claims of former workers.)
  • Unfortunately, in addition filing form 940 with the IRS, you will need to file separate paperwork with the state. Payments are also sent to different places.  Get information about your paying unemployment insurance to your state. Here is a fantastic article on how to reduce SUTA costs by StaffMarket.com.

That’s our article for today.  If you have any questions or comments please leave them in the comments section below.  Also be sure to stay read the next article in this series where we discuss How To Hire The Perfect Freelancer In 3 Steps.

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