The federal and state unemployment tax systems provide monetary benefits to qualified unemployed workers. Federal unemployment, or FUTA, tax is regulated by the Federal Unemployment Tax Act. The State Unemployment Tax Act governs state unemployment, or SUTA, tax. Most employers are required to pay both taxes. The federal rate generally goes for all employers, but state rates vary by employer.
To calculate FUTA tax, you need the annual rate and taxable wage base, which are available in Internal Revenue Service Circular E, Employer’s Tax Guide. In 2015, employers pay FUTA tax at 6 percent of the first $7,000 paid to each employee for the year. You can take a maximum credit of 5.4 percent if you paid your state unemployment tax as required and if federal unemployment tax applies to those same SUTA wages. Employers in credit reduction states cannot take this maximum deduction. “Credit reduction state” means that the state borrowed funds from the federal government to pay its unemployment liabilities and has failed to repay the loan. If you qualify for the maximum deduction, your FUTA rate is 0.6 percent. If an employee does not earn at least $7,000 for the year, pay the tax on whatever amount she earned.
Figuring SUTA Tax
State unemployment tax rates are generally based on the length of time an employer has been in business, the employer’s industry and how much benefits have been drawn on the employer’s account. The annual wage base varies by state. For example, in 2015, employers in Ohio must pay SUTA tax at 6.5 percent of the first $9,000 paid to each worker. Employers in the construction industry normally have a higher rate than non construction employers, and the more benefits an employer pays former employees, the higher its SUTA rate. The state unemployment agency normally notifies employers of their specific rate for the upcoming year.
Determining Taxable Wages
Some wages are exempt from FUTA and SUTA taxes. For example, mileage reimbursement and most fringe benefits offered under a cafeteria plan are not subject to FUTA tax. You would therefore not include those amounts in the $7,000 wage base when calculating federal unemployment tax on employees with those types of wages. IRS Circular E and Publication 15-A provide detailed accounts of what constitutes taxable wages for federal unemployment tax purposes. Consult the state unemployment agency to know which wages are considered taxable for state unemployment tax.
Federal Unemployment Tax Considerations
If you bought a business from another employer, you might be able to factor in the amount the former employer paid on employees who are now working for you when determining your FUTA taxable wage base. Also, if the state excludes certain wages from SUTA tax, such as specific fringe benefits and sick pay, you may have to pay more than 0.6 percent in FUTA tax on those wages. Consult the IRS instructions booklet for Form 940 if these circumstances apply to you.
Paying and Reporting Unemployment Taxes
Generally, FUTA tax liability that exceeds $500 should be paid quarterly to the IRS. You may carry over amounts of $500 or less into the next quarter and make the deposit when the balance exceeds $500. Employers must report their FUTA tax liability annually to the IRS on Form 940. Circular E contains detailed instructions on paying and reporting federal unemployment tax. Follow the state unemployment agency’s rules for paying and reporting SUTA tax.
- U.S. Department of Labor: State Unemployment Insurance Benefits
- IRS.gov: Circular E, Employer's Tax Guide
- Ohio Department of Job and Family Services: Contribution Rates
- American Payroll Association: State Unemployment Insurance Taxable Wage Bases 2012 - 2015
- SurePayroll: Federal Unemployment Tax Act (FUTA)
- IRS.gov: FAQs for Government Entities Regarding Cafeteria Plans
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