Federal Unemployment Tax Act (FUTA)

Understanding FUTA Payroll Tax: Guidelines and Exemptions

What Is FUTA Payroll Tax?

The Federal Unemployment Tax Act (FUTA) mandates that employers contribute to state unemployment programs. This federal law requires a payment of 6 percent on the first $7,000 of each employee’s annual earnings. Most employers benefit from a 5.4 percent FUTA tax credit, resulting in a net rate of 0.6 percent. Employers cease FUTA tax payments after an employee’s earnings surpass $7,000.

Who Must Pay FUTA Tax?

FUTA taxes are obligatory for most employers. Payment is required if wages of $1,500 or more were paid in any calendar quarter or if there was at least one employee for at least part of the day for 20 weeks or more in a calendar year.

Who Is Exempt from Paying FUTA?

Exemptions from FUTA tax are determined by different tests: the general test, household employees test, and farmworkers employees test. Employers usually follow the general test. Exemption occurs if an employee receives less than $1,500 in wages during a calendar quarter or if there is no employee for 20 weeks or more within a calendar year.

• Household Employees Test: Applicable if $1,000 or more is paid to a household employee in a calendar quarter.
• Farmworkers Test: Requires payment if $20,000 or more is paid to farmworkers in any calendar quarter, or if 10 or more farmworkers are employed for some part of a day during 20 or more different weeks in a calendar year.

Are Nonprofits Exempt from FUTA?

Certain nonprofits, particularly 501(c)(3) organizations, are exempt from FUTA. These organizations, focusing on areas like education, health services, and religion, must obtain legal 501(c)(3) status from the IRS. Other nonprofits not meeting this criterion must pay FUTA tax.

How to Calculate the FUTA Cut-Off Mark

FUTA tax is applicable only to the initial $7,000 of an employee’s earnings. With a 6 percent FUTA tax rate, and a 5.4 percent credit for state unemployment fund contributions, the net rate is 0.6 percent. Calculate the tax by multiplying each employee’s wages (up to $7,000) in the quarter by 0.6 percent. The total is the quarterly FUTA tax due on the last day of the month following the calendar quarter.

When Does the FUTA Rate Change?

FUTA rates vary annually. Since the 1980s, the rate has remained around 6 percent, with no increases since 1983. Predicting future rates can be challenging.