The Federal Unemployment Tax Act, or FUTA directs both the states and federal government to run the unemployment tax program for the nation. The program provides payments to workers who have lost their jobs, such as what we have been experiencing during this recession. The states create the actual employment insurance systems and the federal government pays the administration costs of the state programs. It is a joint program and your first responsibility is to the state program. Then, payments made to your state program qualify you for a credit against the federal tax. This tax, just like the state unemployment tax, is the sole responsibility of the employer.
Some of your employees may be exempt and/or if you do not meet the requirements, your company may be exempt from the tax. You should check the requirements by referring to IRS Publication 15 (go to www.irs.gov) for exemptions and limitations. For example, there are special rules for farm workers.
The tax rate is 6.2% and is figured on the first $7,000 of each employee’s wages. If you have paid into your state fund on a timely basis you can take a tax credit of 5.4% of the total FUTA wages against the federal tax rate. That makes the actual tax rate only 0.8%.
The tax is reported on Form 940 and is due on January 31st, for the previous tax year; however, tax deposits may need to be paid on a quarterly basis depending on your total FUTA tax liability. Deposit dates are April 30, July 31, October 31, and January 31, following each calendar quarter. If your accumulated unpaid tax at the end of any calendar quarter is $500 or less, you do not have to make a deposit, but instead, you can add it to the next quarter’s tax liability. The deposit rules are also changing after December 31, 2010, so make sure you are ready to make electronic tax payments for 2011 and beyond.