Important Unemployment Tax Questions for Employers
How, Where and When to Pay Unemployment Taxes
If you have employees, you must pay unemployment taxes to give employees unemployment benefits. It's one of several employment taxes all employers must pay. The following answers can help you with the most common questions about these taxes.
What are Unemployment Taxes?
Unemployment taxes are paid by employers to the federal government and states in order to fund unemployment benefits for out-of-work employees. The unemployment program for employers works like insurance, meaning that employers pay for the coverage. The rate charged (it's called a tax) is based on the type of business.
Unemployment benefits for employees are administered by the U.S. Department of Labor, Unemployment and Training Division. Federal unemployment taxes paid by employers are administered by the Internal Revenue Service (IRS). State unemployment agencies administer their own programs for providing benefits and taxing employers.
How Much Must I Pay for Unemployment Taxes?
First, determine if you need to pay unemployment taxes. You must pay unemployment taxes if:
- You paid wages of $1,500 or more to employees in any calendar quarter in the current year and last year (gross pay), or
- You had one or more employees for at least some part of a day in any 20 or more different weeks in the current year or last year.
Then, determine the tax rate. The Federal Unemployment (FUTA) tax rate is 6.0% of employee wages up to $7,000 in a calendar year. The tax rate is subject to state tax credits. The $7,000 is the federal wage base. But your tax rate might be lower because there are state credits that can be applied.
Generally, you can take a credit against your FUTA tax for amounts you paid into state unemployment funds. The credit may be as much as 5.4% of FUTA taxable wages. If you are entitled to the maximum 5.4% credit, the FUTA tax rate after the credit is 0.6%.
You are entitled to the maximum credit if you paid your state unemployment taxes in full, on time, and on all the same wages as are subject to FUTA tax. If your state has not paid the full amount it owes to the FUTA fund, your credit may be reduced. The IRS has a list of credit reduction states and credit reduction amounts.
The maximum annual amount of FUTA tax for any one employee, including the federal rate and the full state tax credit, would be $7,000 x 0.6%, or $42. This tax amount is paid by you as the employer; it's not paid by employees.
How Does State Unemployment Tax Affect My Payments as an Employer?
The IRS has an Unemployment Tax Trust Fund to pay the costs of administering the federal and state unemployment taxes. Generally, your business gets a credit for amounts you pay to a state unemployment fund.
Some states borrow from this trust fund, and some of those states don't repay the loans. If a state doesn't repay within two years, employers in the state may be required to pay additional unemployment tax.
The unemployment tax process for employers involves three steps:
- Calculating the tax for each payroll, based on employee pay and setting aside the amount in your company's accounting system,
- Paying the tax quarterly, whenever the tax amount is greater than $500, and
- Reporting the tax and payments each year on IRS Form 940.
How Do I Calculate FUTA Taxes?
For each payroll, you must determine FUTA taxes payable based on the total gross pay (pay before any withholding or deduction) paid to employees, up to $7,000 per employee each year. Then multiply this total by the FUTA tax rate (0.06% currently).
After you calculate the total tax for all employees for the pay period, you must set aside that total in a payables account (Unemployment Tax Payable) in your accounting system. Unemployment tax is a trust fund tax, meaning that it is an amount you owe that must be paid to a government agency.
Are Some Payments Exempt from FUTA Tax?
The IRS says you may exclude certain payments to employees from your calculations for employment taxes. These include:
- Fringe benefits such as the value of some meals and lodging, contributions to accident or health plans, and payments for cafeteria plans
- Group term life insurance
- Employer contributions to retirement and pension plans, like 401(k) plans
- Payments for dependent care
How Do I Report FUTA Tax to the IRS?
At the end of each year, you must complete Form 940. The form asks you to calculate the total you owe for the previous year and the amount you have already paid. You must submit the balance to the IRS, along with Form 940, by January 31 of the following year. You can read more about how to complete Form 940 - Employer's Annual Federal Unemployment Tax Return.
How Do I Pay Federal Unemployment (FUTA) Taxes?
FUTA taxes are paid quarterly, for quarters in which you have $500 or more in tax liability, based on the amounts you have set aside from payroll. If your unpaid FUTA tax for any quarter is over $500, you must make a deposit of that unpaid amount by the last day of the month after the end of the quarter, which means April 30, July 31, October 31, and January 31.
If your unpaid FUTA tax is $500 or less, carry it to the next quarter; a deposit is not required.
- First, you must calculate FUTA taxes for each payroll.
- Then, in any quarter in which your total FUTA tax liability is over $500, you must send in a deposit. All employment tax deposits must be made using EFTPS (federal tax deposit system. Read more about EFTPS, including how to register and make payments.
- At the end of every year, you must pay any FUTA amount due from the previous year, when you file the annual unemployment tax report on Form 940.
How Do I Get Started Paying and Reporting Unemployment Taxes?
When you start a new business, you must designate an expected number of employees on your employer ID application. This provides information to the IRS and your state that you have an obligation to pay and report unemployment taxes, and they will probably contact you.
If you are not contacted, or if you decide at some later point to hire your first employee, you can get the process started by yourself. Register with your state (see below) and contact the IRS to start paying unemployment insurance.
How Do I Find Out About State Unemployment Taxes?
Each state has a separate program for providing unemployment compensation benefits to workers and for funding those benefits. States usually set up funds into which the taxes are paid. The U.S. Department of Labor has information on state unemployment tax regulations.
Do Household Employers Have to Pay Unemployment Tax?
If you pay employees to work in your home, you may have to pay unemployment tax based on their pay. IRS Publication 926 - Household Employer's Tax Guide has more information.