The Federal Unemployment Tax Act - also known as FUTA - is a US federal law that imposes a federal payroll tax on any business that has employees. The income generated on this part is allocated to state unemployment agencies and is used to fund unemployment benefits and employment service programs for people who lose their jobs. Although FUTA is a payroll tax based on the wages of employees generally, it is imposed on employers and not their employees, which means that an employee's wages are not deducted. FUTA differs from Social Security tax, which applies to both employer and employees.
According to the Law, it is mandatory for employers to pay annual or quarterly taxes, and they constitute a part of what is known as payroll.
How to use the Federal Unemployment Tax Law
Federal Unemployment Tax Act reporting requirements vary depending on the entity remitting the Internal Service income tax by filing IRS Form 940, which is typically filed in the first quarter of the year. FUTA taxes can be paid annually or quarterly, and the amount of an employer's tax debt is the main determining factor of when the tax is due.
There are different requirements for different types of entities or employers:
Business: A business must meet at least one of the following two conditions to be eligible to submit FUTA:
- You have completed payment of at least $1,500 in wages during any quarter of the current or prior year. A calendar quarter is January-March, April-June, July-September and October-December.
- Had at least one employee (full-time, part-time, or temporary) for at least part of the day in at least 20 different weeks of the current or prior year.
Domestic Employers: Applies to employers who hire babysitters, babysitters, housekeepers, or other people who provide services in their own home. FUTA tax is due if the following conditions are met:
- The employer has paid cash wages of at least $1,000 to a household employee at any time during the year.
- The household employee has performed menial duties at a home, college club, or local chapter of a college fraternity.
Agricultural/livestock employers: FUTA contributions must be paid if the employer meets one of the following conditions:
- The employer has paid cash wages of at least $20,000 to farmworkers at any time during the year.
- At least 10 farmworkers have been employed for 20 or more variable weeks of the year.
Other Employers: Indian Tribal Administrations are usually exempt from FUTA tax. The essential condition, however, is that the tribe has participated in the state unemployment system throughout the year and continues to comply with current and applicable unemployment laws. Other organizations exempt from FUTA include religious, educational, scientific, and charitable organizations, among others.
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