What is the Federal Unemployment Tax Act (FUTA)

The Federal Unemployment Tax Act (FUTA) is a United States federal law that imposes a payroll tax on employers to fund state workforce agencies and unemployment insurance for workers who have lost their jobs.

This tax is part of a federal-state partnership and helps to cover the costs of administering unemployment benefits and job service programs in every state. It is different from other payroll taxes such as the FICA tax, which funds Social Security and Medicare.

What is the current FUTA tax rate for employers?

The FUTA rate in 2024 is 6.0% on the first $7,000 USD of income paid to each employee annually (referred to as the federal or FUTA wage base). However, employers can receive a FUTA tax credit of up to 5.4% for state unemployment taxes paid, effectively reducing the FUTA tax rate to 0.6% if they pay state unemployment taxes in full and on time.

Employers can make their FUTA tax payments through the Electronic Federal Tax Payment System (EFTPS). Visit the Internal Revenue Service (IRS) website for the most up-to-date FUTA information.

How does FUTA benefit the workforce?

FUTA benefits the workforce by providing unemployment compensation to workers who have lost their jobs due to no fault of their own. It ensures that there is a safety net available which can help maintain economic stability for individuals and communities during periods of unemployment.

While FUTA is a federal government tax, unemployment insurance funds are also collected at the state level through the State Unemployment Tax Act (SUTA). This combined support helps unemployed workers meet their basic needs while they search for new employment.

What are the eligibility requirements for FUTA?

To be subject to FUTA, an employer must either pay $1,500 or more in employee wages in any calendar quarter or have at least one employee working for some part of a day in 20 different weeks during the tax year. Different rules apply to household employees and agricultural employers, such as farmworkers. Employers must determine their FUTA liability based on these criteria and ensure compliance with the tax regulations.

How does FUTA impact team and business needs?

FUTA impacts team and business needs by imposing a financial obligation on employers that must be factored into overall payroll and budgeting strategies. It is an essential part of the cost of doing business in the US and contributes to a company's social responsibility. Ensuring compliance with FUTA helps maintain a stable workforce and can indirectly support employee morale by contributing to the state unemployment insurance system.

How can an employer improve their FUTA compliance?

An employer can improve their FUTA compliance by keeping accurate payroll records, calculating the FUTA tax correctly, and making timely payments. Employers should stay informed about changes in tax laws and seek advice from tax professionals or use payroll services that automatically calculate and remit FUTA taxes. Regular internal audits of payroll practices can also help ensure ongoing compliance.

What strategies can be employed to manage and reduce FUTA tax liability?

Employers can manage and reduce FUTA tax liability by ensuring that they take full advantage of the available tax credit for state unemployment taxes paid. Additionally, employers can focus on reducing turnover and layoffs, as a stable workforce can lead to lower state unemployment tax rates and, consequently, a lower FUTA tax liability.

How is FUTA tax calculated and reported?

FUTA tax is calculated based on the first $7,000 earned by each employee in a calendar year. Employers must report FUTA tax by filing IRS Form 940, "Employer's Annual Federal Unemployment (FUTA) Tax Return," which is due annually. Employers must also deposit FUTA tax quarterly if the tax due is more than $500 for the quarterly payment.

What role does FUTA play in global hiring and a global workforce?

While FUTA is specific to the US, it plays a role in global hiring by affecting companies with employees in the US. Multinational companies must comply with FUTA for their US-based employees while also managing unemployment insurance contributions in other countries where they operate. Understanding FUTA is crucial for global businesses to ensure adherence to local tax laws and avoid penalties.

What are potential legal or compliance issues related to FUTA?

Potential legal or compliance issues related to FUTA include failure to pay the correct amount of FUTA tax, late payments, or failure to file Form 940.

In severe cases, noncompliance can lead to legal action and damage to the business's reputation. Employers must ensure they understand the FUTA regulations and deadlines to avoid these issues and the potential for audits and legal challenges.

How can an employer measure the effectiveness of their FUTA practices?

An employer can measure the effectiveness of their FUTA practices by regularly reviewing their compliance status, ensuring that FUTA taxes are calculated correctly, and that payments and filings are made on time. Employers can also assess the stability of their workforce, as lower turnover rates may indicate reduced FUTA and state unemployment tax liabilities.

Simplify US payroll compliance with Deel

FUTA remains a critical component of the US social safety net and labor market stability. Employers must navigate its intricacies to maintain compliance and contribute to the well-being of the workforce, while also managing their financial obligations and business operations effectively.

Deel can help US companies strengthen their payroll compliance with US Payroll and PEO services. With Deel, you can ensure compliance with federal, state, and local benefit laws, COBRA administration, ACA compliance, and more. Book a 30-minute demo with an expert to learn more.