What is the Federal Unemployment Tax (FUTA)?

When Federal Unemployment Tax Deposits are Due

Federal Unemployment Tax (FUTA) Explained
Federal Unemployment Tax (FUTA) Explained with Due Dates. DNY59/Getty Images

What is Federal Unemployment Tax? 

The Federal Unemployment Tax (FUTA) is paid by employers to fund the unemployment account of the federal government, which pays employees who leave a company involuntarily. Businesses also may have to pay state unemployment taxes, which are coordinated with the federal unemployment tax. 

How Do Unemployment Taxes Work? 

The unemployment tax system works like this:

  • Employers into the system, based on a percentage of total employee wages
  • The amount paid is put into a fund which pays unemployment benefits to employees who have been laid off (not for those who have left voluntarily).
  • The federal government collects unemployment funds and pays into state funds to supplement funds the states collect.

What is the Amount of Federal Unemployment Tax? How is it Paid and When? 

Employers pay federal unemployment tax based on employee wages or salaries. The FUTA tax percentage is 0.8 percent of the first $7,000 of wages per year. Thus, the maximum annual amount of FUTA tax for any one employee is $56.

FUTA tax payments may be offset by any state unemployment fund to which the employer is required to contribute.

When are Federal Unemployment Tax Deposits Due? 

First, an employer calculates the amount of federal unemployment tax for a payroll (all of the employee paychecks for a pay period). This amount is set aside in a payables account.

 

Payments are made by employers into the federal unemployment tax fund at the IRS, using the Electronic Federal Tax Payment System. How often payments are required to be made depends upon the number of employees and the amount of tax owed. 

If your company's FUTA Tax liability in any one quarter is more than $500, you must make a deposit by the last day of the month after the end of the quarter.

For example, if your liability in Quarter 1 (ending March 31) is $350, you do not need to make a deposit. but if your liability in Quarter 2 (ending June 30) is $200, your liability is $550, and you must make a deposit by July 31. Since you have made a deposit for Quarters 1 and 2, if your tax liability for Quarter 3 (ending September 30) is under $500, you do not need to make a deposit for the 3rd Quarter.

If your unemployment tax liability at the end of the year is over $500, you must make a deposit by January 31 of the following year or with your Annual Unemployment Tax Report on Form 940.

If your FUTA tax for any of the first three quarters of the year (plus any un-deposited amount from an earlier quarter) is over $500, deposit it by the last day of the month after the end of the quarter. If it is $500 or less, carry it to the next quarter; a deposit is not required.

How are Federal Unemployment Taxes Reported to the IRS? 

FUTA taxes are reported annually on Form 940 (Employer's Annual Federal Unemployment (FUTA) Tax Return. For more information read How to Complete Form 940.

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