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Federal Unemployment Tax Act (FUTA) Overview

The Federal Unemployment Tax Act (FUTA) requires employers to pay a federal tax on wages to fund unemployment benefits. This tax is paid exclusively by employers and is not deducted from employees’ wages.

Who Pays FUTA?

Employers are required to pay FUTA tax if they meet either of the following criteria:

  1. They paid wages of $1,500 or more to employees in any calendar quarter during the current or previous calendar year.
  2. They employed at least one worker for some part of a day in any 20 or more different weeks in the current or previous calendar year.

FUTA Tax Rate and Wage Base

  • Standard FUTA Tax Rate: 6.0% on the first $7,000 of each employee’s annual wages.
  • Credit for State Unemployment Tax: Employers can receive a credit of up to 5.4% for state unemployment taxes paid, reducing the effective FUTA tax rate to 0.6%, assuming the state unemployment tax is paid in full and on time.
  • Taxable Wage Base: Only the first $7,000 of each employee’s wages is subject to FUTA tax. Wages above $7,000 for the same employee in the calendar year are exempt.

How to Calculate FUTA Tax

  1. Identify Eligible Employees: Include employees subject to FUTA. Certain groups, such as independent contractors or self-employed individuals, are excluded.
  2. Determine Taxable Wages: Count wages paid to each employee up to $7,000 annually.
  3. Apply Tax Rate:
    • Standard rate: 6.0%.
    • Effective rate (with maximum state tax credit): 0.6%.
  4. Example Calculation:
    • An employee earns $8,000 in the year.
    • Only $7,000 is taxable under FUTA.
    • Tax at 0.6% (with credit): $7,000 × 0.006 = $42.

How to Pay FUTA Tax

  1. Quarterly Deposits:
    • Employers must deposit FUTA taxes quarterly if the accumulated tax is more than $500 for the quarter.
    • If the tax is less than or equal to $500, carry it forward to the next quarter.
    • Payments are made through the Electronic Federal Tax Payment System (EFTPS).
  2. Annual Reporting:
    • File Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, by January 31 of the following year.
    • The form reports total FUTA wages, credits for state unemployment taxes, and tax liability.

Quarterly Deposit Threshold

  • If FUTA tax liability exceeds $500 in a quarter:
    • Deposit the amount by the end of the month following the quarter.
  • If liability is $500 or less:
    • Carry the amount forward to the next quarter until the total exceeds $500 or file with the annual return.

Filing Form 940

  1. Report total FUTA wages.
  2. Deduct any credits for state unemployment tax paid.
  3. Calculate the net tax owed.
  4. Submit Form 940 electronically or via mail by the due date.

Important Deadlines

  • Quarterly Deposits: End of the month following the quarter in which the liability exceeds $500.
  • Annual Form 940: January 31 (or February 10 if all deposits are made on time).

Penalties for Noncompliance

  • Late Filing: 5% of the unpaid tax per month, up to a maximum of 25%.
  • Late Deposits: Penalties vary from 2% to 15%, depending on the delay.
  • Interest: Charged on any unpaid taxes from the due date until payment.

For further assistance or clarification, consult the IRS Publication 15 (Circular E) or contact a tax professional.

Texas State Unemployment Tax (SUTA) Overview

In Texas, employers are required to pay state unemployment taxes to fund unemployment benefits. The Texas Workforce Commission (TWC) administers this tax.

Texas SUTA Tax Rate and Wage Base

  • Standard SUTA Tax Rate: Varies annually based on the employer’s experience rating and the state’s unemployment fund balance.
    • New employers typically start with a fixed rate. For 2025, this is 2.7% for non-construction employers.
    • Established employers’ rates range between 0.31% and 6.31%, depending on their experience rating.
    • Construction employers may have a higher rate.
  • Taxable Wage Base: The first $9,000 of each employee’s annual wages is subject to Texas SUTA tax. Wages exceeding $9,000 per employee in a calendar year are exempt.
  • Additional Obligations: Employers must also pay a replenishment tax and an obligation assessment tax, both of which are calculated as part of the total SUTA rate.

Example Calculation

  1. New Employer Rate: 2.7%.
  2. Employee Wage: $10,000 annually.
  3. Taxable Wages: Only $9,000 is subject to tax.
  4. Tax Due: $9,000 × 0.027 = $243.

Important Notes

  • Timely Payment: Employers must pay SUTA taxes to the Texas Workforce Commission by the quarterly deadlines to avoid penalties and maintain eligibility for FUTA tax credit.
  • Reporting: Employers report taxable wages and submit payments through the TWC’s Unemployment Tax Services system.

For detailed rate information or specific guidance, consult the Texas Workforce Commission website or contact TWC directly.