Federal unemployment tax liabilities have specific deposit requirements. The Federal Unemployment Tax Act (FUTA) requires that a federal unemployment payroll tax be paid by most businesses that have employees. A FUTA tax return is filed annually on IRS Form 940, but the tax liability must be calculated each quarter. The deposit frequency requirement depends on the total amount of the quarterly calculated liability, and if it is over the specific designated threshold.
The federal unemployment tax, commonly referred to as FUTA tax, is a payroll tax that is based on compensation paid to employees. It is paid by the employer on a specified amount of the earnings of each employee. Like many payroll taxes it has specific deposit requirements that must be followed to avoid additional costs due to penalties.
FUTA tax calculations are done quarterly based on the annual FUTA tax rate (6.2 percent in 2009) and allowable reductions for required state unemployment tax contributions. The maximum state contribution credit is currently and generally 5.4 percent for employers that pay all state unemployment tax contributions on time as required. The credit is available to all states that have made timely state payments. The District of Columbia, Puerto Rico and the U.S. Virgin Islands are also included.
Calculation of FUTA Deposits
FUTA tax should be calculated each quarter on up to the first $7,000 of earnings of each employee. The tax rate of 6.2 percent (.062) should be reduced by the maximum allowable state tax rate of 5.4 percent (.054) and the resulting rate of 0.8 percent (.008) is the percentage used to calculate the deposit liability for the quarter (.062 - .054 = .008). The total of the wages of up to $7,000 of each employee is then multiplied by .008 percent. For example, if employee A earned $5,500 in the first quarter and employee B earned $7,100 in the first quarter, the calculation would be $5,500 + $7,000 = $12,500 x .008 percent. This would result in a total first quarter tax liability of $100. This is the amount that would be used to determine if a deposit is required for that particular quarter. At the maximum rate the calculation yields $56 of tax due for each $7,000 of taxable income. The FUTA tax rates and thresholds are subject to change annually and should be verified at the beginning of each calendar year.
If the calculated FUTA liability is greater than $500 for any quarter, a deposit is required. Each quarter that the liability is under $500 the calculated amount of tax liability is carried forward and is combined with the calculated tax amount for the next quarter. This can continue for the entire year if the payment threshold of $500 is never reached. If the balance due after the fourth-quarter calculation is under $500 it can be paid with the return or deposited. If the balance due is over $500 after the fourth-quarter calculation it must be deposited by the filing date of the annual Form 940 (generally January 31 of the following year).
Quarterly deposit filing dates are generally the last day of the month following the close of a quarter unless it falls on a weekend or holiday. Generally January through March deposit is due April 30; April through June is due July 31; July through September is due October 31; and October through December is due January 31 of the following calendar year. If the due date falls on a weekend or holiday, the tax deposit is due the following regular bank business day.
You may file your deposits electronically by using the federal payment acceptance system, EFTPS. You must enroll in advance to access EFTPS. You can enroll by phone by calling 1-800-555-4477 or online at www.eftps.gov. You can also make federal tax deposits at authorized banks. If you are under the $500 balance due and not required to deposit your tax, you can send your payment with the return.
Federal payroll tax payments should be made out to "United States Treasury." They should not be made payable to the IRS or to the U.S. Treasury. The memo line of a check or money order should include either an Employer Identification Number or a Social Security Number, whichever is applicable. It should also include the form number or type of tax that is being paid and the applicable tax period or year.