The acronym FUTA stands for Federal Unemployment Tax Act. It refers to the Federal laws that mandate business owners and employers to pay taxes that are used to fund government-run unemployment support schemes.
The FUTA amount equals $420, which is 6% of the first $7,000 paid to each employee annually.
The FUTA amount is fixed, equivalent to 6% of the first $7,000 paid to each employee annually. Once an employer has paid this amount - $420 for every employee earning more than $7,000 in a year - they don’t need to pay any other FUTA taxes.
How does FUTA Work?
The Federal Unemployment Tax Act (FUTA) collects money to fund state unemployment benefits and employment assistance programs.
Federal unemployment taxes, which are part of what is collectively referred to as payroll taxes, must be paid by employers yearly or quarterly as mandated by the Act.
Money in this pool is used to pay unemployment benefits to individuals who lose their jobs. Even though the FUTA amount is calculated based on an employee's earnings, it is levied solely on businesses, not their workers.
How do I Calculate FUTA Taxes?
The FUTA tax that a business must pay can be easily calculated. The first $7,000 in wages paid to an employee working for minimum wage (not including exempt payments) or more is subject to Federal Unemployment Tax Act (FUTA) taxes.
In 2022, the FUTA tax rate was set at 6.0%, and employers may be offered a credit of 5.4% of this tax.
Let's say that in a particular year, employee S received $11,000 in taxable wages while Employee N received $8,000 in taxable wages.
FUTA is only applicable on the first $7000 annual earnings of an employee. So as long as they earn at least $7000 annually, they need to pay 6% of that $7000 as tax which equals $420. So the employer would need to pay a total of $840 for Employee S and Employee N, with $420 each despite S earning more than N.
Comparison Between SUTA and FUTA
A large number of states mandate employers to pay an extra state-sanctioned unemployment tax. This is known as State Unemployment Tax Act or SUTA.
It may be interesting for you to know that when an employer pays SUTA taxes, it helps them reduce the FUTA taxes.
Furthermore, when an employer pays SUTA taxes in full, they automatically become eligible to receive a tax credit of up to 5.4% of the total taxable income. However, this amount is deducted from the cumulative sum of federal unemployment taxes the employee owes.
Employers eligible for the maximum credit will receive a marginal tax rate of 0.6%. This is substantially lower than the standard rate of 6%. Therefore, the lowest amount of FUTA tax that an employer is required to pay is $420 for each employee. However, businesses that aren't required to pay state unemployment taxes are not eligible for the Federal Unemployment Tax Credit.
Comparison Between FICA and FUTA
Taxes collected under FICA or the Federal Insurance Contribution Act are distinct from FUTA in many ways, even though both are used to pay for unemployment benefits.
First, employees and employers are accountable for contributing to the FICA tax. Self-employed people are typically required to record both portions of the tax, as the tax is divided equally between the two categories.
Furthermore, the Federal Insurance Contributions Act (FICA) was created to help pay for various government services and programs. This amount is automatically adjusted from each employee's pay, and the federal government mandates that employees and their employers contribute to it.