Federal Unemployment Taxes (FUTA) can get confusing, especially when they change from year-to-year and vary depending on your state. In this guide, we’ll explain what you need to know about FUTA and Form 940 for submitting taxes in 2016.
If you do not use an online payroll program this process will take some calculations and time reaching out to multiple government agencies. This is why we recommend using Gusto’s payroll software (formerly Zenpayroll), which handles all this for you automatically. You can read why we recommend Gusto in our complete guide, or click here to sign up for a free 60-day trial.
What is FUTA and Form 940?
To start off, let’s go over some definitions:
FUTA stands for Federal Unemployment Tax Act. This law provides the framework for how states run their unemployment benefit programs.
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. In most states you pay $42 per employee. The exception is if you live in one of 3 states (Connecticut, California, or Ohio) and 1 US territory (The Virgin Islands), which may be liable for higher FUTA taxes in 2016.
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 from the IRS website.
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.
If you use Gusto’s payroll software, they will handle your SUTA and FUTA payments automatically so you don’t have to worry about missing a deadline.
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. Note: The rules are slightly different for household employees and farmworkers. You can see the full 2015 requirements here on the FUTA website.
Does FUTA apply to independent contractors (1099 workers)?
No. Because these workers are not technically your employees, their wages are not subject to FUTA taxes. Business owners may see this as a potential loophole (reclassifying employees as freelancers) although keep in mind that the Department of Labor (DOL) has stiff guidelines on who you can categorize as freelancers. Misclassifying employees can make you liable for back wages and back taxes.
How much is the 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. This means the maximum FUTA liability is $42 for many businesses ($7,000 * 0.006 = $42).
The exception is if you live in California, Connecticut or Ohio. As of 2015, these states owe the federal government money for unemployment benefits. As a result, the FUTA reduction is lowered, and businesses have to pay a higher tax liability.
FUTA Tax by State
2015 FUTA Rate
Max. FUTA Tax per employee
*Projected 2016 FUTA Rate
Rest of USA
*2016 Rates are estimated, based on each state’s current plans to repay their loans.
FUTA credit reductions are not announced until November of each year. Additional tax liabilities are due by January 31st, at the same time you submit your Form 940.
What’s the FUTA Tax Rate for 2016?
If you live in a state besides California, Connecticut, Ohio (or the Virgin Islands), your rate will be 0.6% for 2016.
If you do live in one of the above states, you’ll know the official FUTA tax rate by November. The DOL announces FUTA reductions in November of each year. This is to give states appropriate time (until November 10th) to catch up on their unemployment loans.
The estimates we posted above are based on state’s current plans to repay their loans. According to CorporateCostControl, Ohio has plans to replay their loan in 2016, and thus earn the full reduction for their businesses. California does not plan on repaying their loan until 2017, so businesses are likely to pay a FUTA rate of 2.4% in 2016 (There is an added 0.3% penalty each year the loan is outstanding). Connecticut and the Virgin Islands, likewise, do not have any formal plans to repay their loans in 2016.
When and How Are FUTA Taxes Paid?
FUTA taxes must be paid quarterly by the last day of the month following the end of a calendar quarter: April 30, July 31, October 31 and January 31. On April 30, for example, you would pay FUTA taxes owed during January, February, and March. If you’re a company that has yearlong employees, the majority of your FUTA expenses will be made during the first quarter. However, 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.
Note: Because FUTA credit reductions are not formally announced until November, businesses in CA, CT, OH and VI should pay the standard 0.6% rate throughout the year. After the credit reduction is formally announced in November, 2016, businesses have until January 31st, 2017 to pay should pay their additional liability.
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 with the IRS here, or sign up for Gusto and let them take care of it.
If you do not use an online payroll program this process will take some calculations and time reaching out to multiple government agencies. This is why we recommend using Gusto’s payroll software, which handles all this for you automatically. Click here to start your free 60-day trial today.
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.
If you’re using online payroll software Gusto, then the 940 form will be submitted for you. FUTA taxes will also be calculated automatically and paid on your behalf.
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.
The Bottom Line
Unemployment taxes can be complicated, and failing to pay on time or filing incorrectly can make you liable for more charges. This is why we recommend using an online payroll program such as Gusto.
On top of giving you an easy-to-use system to pay your employees with direct deposit, Gusto handles all state & federal tax payments and paperwork, including FUTA, SUTA, payroll taxes, social security and more. Click here to start your free 60-day trial today.