Both FUTA and SUTA taxes are the means by which the federal government and states pay unemployment compensation to workers who have lost their jobs. While federal and state unemployment taxes are calculated and paid separately, they are connected. As an employer, you need to understand the intricacies of FUTA and SUTA calculations to be sure that you are not under- or over-paying on your tax liability.
FUTA and SUTA Taxes Defined
Determining State Unemployment Tax Rates
Calculating SUTA Tax
The process of calculating your state unemployment tax is fairly straightforward, but it is important that you maintain a close watch on your current rates and update your calculation figures as necessary. You can do this manually in your accounting software or it will be done automatically if you use a payroll service. Here's how to figure your SUTA tax:
1. Calculate the Employee Portion
Multiply the total wages paid to your employee by the current employee rate. For example, an employee paid $3,750 bi-weekly with a tax rate of 0.06% would have $2.25 withheld from their paycheck each pay period. Over the course of the quarter, if their total payments totaled $22,500, the amount to be deposited to the SUI fund would total $13.50 ($22,500 x 0.0006 = $13.50).
2. Calculate Your Employer Portion
Fortunately for employers, there is a wage base limit on the amount of tax they must pay for each employee, especially since rates are typically higher for employers. If the wage base limit is $10,000, the employer must only pay tax on the first $10,000 paid to each employee. Therefore, for the person above, an employer rate of 2.3509% yields a tax contribution of $235.09 ($10,000 x .023509 = $235.09) for that quarter.
Figuring Your Employer FUTA Tax
FUTA and SUTA calculations differ in that the federal tax is strictly an employer liability, meaning that no funds are withheld from your employees. The tax liability, however, is still based upon the amount of wages you pay each employee. Here's how to calculate your total FUTA tax.
1. Calculate Total Employee Payments
Figure the total payments made to your employees including wages, salaries, bonuses, sick pay, contributions to a 401(k), contributions to an adoption plan, the value of non-cash fringe benefits and reported tips of more than $20 per month. Check the IRS Form 940 instructions for a complete listing of what payments to include.
2. Calculate FUTA Exempt Payments
Determine what amount of the payments is exempt from the FUTA tax, if any. Examples of payment exemptions include certain types of fringe benefits, group term life insurance, retirement or pension payments, dependent care or other miscellaneous payments. Check the IRS's Employer Tax Guide, Pub. 15, for a complete explanation of what payments are exempt.
3. Calculate Payments Over $7,000
Next, calculate the amount of payments made to each employee in excess of $7,000. In other words, subtract 7,000 from the total paid to each employee and add all the resulting amounts. For example if you paid three employees wages of $42,000, $25,000 and $36,000, your calculation would result in $35,000, $18,000 and $29,000 respectively. The total amount of payments in excess of $7,000 would, therefore, be $82,000.
4. Add Your Subtotal
Determine your subtotal by adding your FUTA exemptions and the total amount of payments in excess of $7,000. Using the figures above and assuming a $2,500 payment for dependent care as an exemption, the subtotal would be $84,500.
5. Calculate Totals Before Adjustments
In order to determine the total amount subject to the FUTA tax, simply subtract the subtotal from the total amount of payments made to your employees. In the example above, this would result in a total taxable amount of $18,500 ($103,000-$84,500= $18,500). Multiply this total by the standard rate of 0.006 ($18,500 x 0.006 = $111) and enter the result on line eight of Form 940, labeled "FUTA tax before adjustments".
6. Add Any Adjustments to the Tax
Determine if you need to make any adjustments to your tax liability. If you were not required to pay any state unemployment (SUTA) taxes on wages you paid throughout the quarter, there is no money credited to you within your state system, therefore you are required to pay an additional amount of FUTA tax. Calculate the additional amount by multiplying 0.054 by the total taxable wages. In our example this would result in an adjustment of $999 ($18,500 x 0.054 = $999). Input this figure on line nine.
Additional adjustments may come into play if only some of your FUTA wages were excluded from state unemployment tax or you paid any of your state unemployment taxes late (after the filing deadline for FUTA taxes). You must calculate your adjustment using a special worksheet included in the instructions for Form 940.
7. Arrive at Tax Amount for Deposit
Add any adjustments to the previous subtotal to arrive at the final amount for payment. If the total tax due is greater than $500, you must make a deposit for that quarter by the due date which occurs one month after the quarter ends. Since FUTA and Form 940 cover the entire calendar year, you are not required to make a deposit if your liability is less than $500 in a quarter. The amount owed carries over into the next quarter, but once the $500 threshold is reached, you must make a deposit. Form 940 and all payments must be made by the end of January in the next calendar year.
Be aware that there might be an additional adjustment required if your state is subject to a credit reduction. If a state is unable to pay all unemployment claims from their own funds, they may borrow from the federal system, in which case they are required to pay back the loan within a specified period. Failure to do so results in a credit reduction status where employers in that state must pay an additional amount of federal tax in order to get the state's loan repaid. State agencies will inform employers if this situation were to occur. As of 2018, only the U.S. Virgin Islands are subject to a credit reduction.