Federal Unemployment Tax Act (FUTA) Tax

The Federal Unemployment Tax Act (FUTA) tax is a federal payroll tax in the United States that employers are required to pay to fund unemployment benefits for workers who have lost their jobs. FUTA is part of the broader social safety net system designed to provide financial assistance to individuals who are unemployed through no fault of their own.

  1. Employer Responsibility: Employers are responsible for paying the FUTA tax. It is not deducted from employees' wages.

  2. Funding Unemployment Benefits: The funds collected through the FUTA tax are used to provide unemployment compensation benefits to eligible workers who are unemployed and actively seeking employment. These benefits are administered by state unemployment agencies.

  3. Tax Rate: The FUTA tax rate can vary but is typically set at a federal rate of 6% on the first $7,000 of each employee's wages. However, employers who pay state unemployment taxes on time and in full may receive a credit of up to 5.4%, effectively reducing the federal tax rate to 0.6%.

  4. State Programs: In addition to the federal FUTA tax, employers are also required to pay state unemployment taxes to fund state-level unemployment insurance programs. These state taxes may vary in rate and rules from one state to another.

  5. Reporting and Payment: Employers must report and pay their FUTA taxes on Form 940, which is filed annually with the Internal Revenue Service (IRS). This form details the wages paid to employees and calculates the amount of FUTA tax owed.

  6. Threshold for FUTA Liability: Employers are liable for FUTA tax if they paid at least $1,500 in wages during any calendar quarter in the current or previous year, or if they had one or more employees working for at least some part of a day in any 20 or more different weeks in the current or previous year.

It's important for employers to accurately calculate, report, and pay their FUTA taxes to remain in compliance with federal tax laws and to ensure that funds are available to support the unemployment insurance system. Failure to do so can result in penalties and interest charges. Processing payroll through HHAeXchange Payroll ensures that all payroll taxes, including FUTA, are paid accurately and on time.

The Federal Unemployment Tax Act (FUTA) provides funds for paying unemployment compensation to workers who have lost their jobs. Employers pay federal and state unemployment taxes, with the FUTA tax rate set at 6% of the first $7,000 paid to each employee per year. However, employers can receive a credit of up to 5.4% when they pay their state unemployment taxes on time and in full. This effectively reduces the FUTA tax rate to 0.6%, which is the default rate in use at Salsa.

A FUTA credit reduction occurs when a state has borrowed funds from the federal government to cover its unemployment benefits and has not repaid the borrowed amount within the allowed timeframe. In such cases, the state's employers may experience a reduction in the credit they receive, resulting in an increase in the effective FUTA tax rate they have to pay.

This reduction in the credit effectively raises the FUTA tax rate for affected employers, leading to higher federal unemployment taxes. States that have outstanding federal loans to cover unemployment benefits may trigger this credit reduction, impacting employers within those states.

For 2024, the two states with a FUTA credit reduction are:

  • California 0.9%

  • New York 0.9%

Worker's in this state has an additional 0.9% of taxes owed by the business at the end of the year, capping out at $63 per employee. Salsa provides notification of affected businesses, the amount owed, and debit the business the following week.