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How to Calculate FUTA and SUTA taxes


Federal Unemployment Rate Change 2013 and 2014 (read update below)

FUTA and SUTA taxes are forms of payroll tax that are computed from the wages of all W-2 employees. FUTA is an acronym for the Federal Unemployment Tax Act, and SUTA stands for State Unemployment Tax Authority. Calculating these taxes based on employee payrolls is very simple.

 

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(Updated 2/01/2014)

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  • Determine whether you must pay FUTA tax for your employees. Consult IRS Publication 15, page 29, to see if you meet the criteria for any of the three tests prescribed therein. These tests pertain to the amount of wages paid per calendar quarter, household employees and farm workers. If you meet the criteria for any one of these tests, you must pay FUTA taxes for your employees. W-4 Forms.
  • For SUTA taxes, find your state unemployment office by looking in the appendix to IRS Publication 926. As an employer, you are required to file state unemployment taxes on a quarterly basis.
  • Calculating FUTA and SUTA tax

  • Calculate FUTA tax by multiplying the first $7,000 an employee earns by 6.0 percent. x $7,000 = $420. This is the amount of FUTA tax that an employer must pay for the employee making at least $7,000 must pay each year.

    By contributing SUTA taxes for your employees for their state unemployment contributions. As an employer you can take a credit of up to 5.4 percent of their taxable wages against their FUTA contribution. Employers who make the maximum permissible SUTA contributions are left with an effective FUTA tax rate of 0.6 percent, or $42 per year. However, your state has to be in good standing with the federal government and the employee must pay the SUTA tax in a timely manner to get the credit.

Federal Unemployment Rate (FUTA) increases for 2013 and 2014

The Federal Unemployment Tax Act (FUTA) tax rate is normally 0.6% of taxable wages paid, or $42 per employee per year. However, employers in twelve states and the U.S. Virgin Islands will pay increased FUTA taxes in January 2013, based on FUTA taxable wages paid in the affected jurisdictions during 2013.

You calculate the SUTA tax by finding the wage base in your state. New employees are assigned an initial lower rate of withholding, the exact rate varies from state to state, for the first year or two. Then the withholding is reduced if the employee has not drawn unemployment benefits or increased if benefits have been collected. In most cases, the SUTA tax rate is ultimately determined by the number of unemployment claims the state has received from taxpayers who formerly worked for you. The rate usually starts at the highest level and decreases if few of your ex-employees file for benefits. However, when state UI funds are depleted, as occurred in many states in recent years, states draw from a designated Federal loan account. If such loans are not repaid within two consecutive years, part of the 5.4% FUTA tax credit is reduced, thereby increasing the effective FUTA tax rate in those states.

When this credit reduction applies, the FUTA tax typically increases by 0.3%, or $21 per worker, payable in January of the following calendar year with IRS Form 940. This credit is further reduced annually by 0.3% until loans are repaid. The United StatesDepartment of Labor has identified the states that are subject to FUTA credit reduction for 2013.

Arizona, Florida, Nevada, New Jersey, and Vermont do not have credit reductions for 2013 and repaid their loan balances for 2012. South Carolina's credit reduction avoidance application was approved by the Labor Department, so they will not have a 2013 credit reduction despite having a federal unemployment loan balance.

States with 2013 Federal Unemployment Tax Act (FUTA) Credit Reductions

Employers in the following states will be subject to a reduction in FUTA credit on their IRS Form 940 for 2013:

Futa Credit Total FUTA Rate FUTA tax  Percentage
State Reduction per Employee Increase
Arkansas 0.9% 1.50% $105 150%
California 0.9% 1.50% $105 150%
Connecticut 0.9% 1.50% $105 150%
Delaware 0.6% 1.20% $84 100%
Georgia 0.9% 1.50% $105 150%
Indiana 1.2% 1.80% $126 200%
Kentucky 0.9% 1.50% $105 150%
Missouri 0.9% 1.50% $105 150%
New York 0.9% 1.50% $105 150%
North Carolina 0.9% 1.50% $105 150%
Ohio 0.9% 1.50% $105 150%
Rhode Island 0.9% 1.50% $105 150%
Virgin Islands 1.2% 1.80% $126 200%
Wisconsin 0.9% 1.50% $105 150%
 

Source U.S. Department of Labor

http//www.workforcesecurity.doleta.gov/unemploy/finance.asp

Example: If employee worked in Arkansas , which is a credit reduction state for the second consecutive year, the total FUTA tax would be $105 ($7,000 x (0.6% + 0.3% + 0.3% + 0.3%)).

What will happen in 2014?
Employers in the credit reduction states identified above should plan on increased FUTA taxes in 2014 (payable in January 2014). Unless a state pays off the loan or changes in tax laws, the FUTA credit reduction will automatically increase by another 0.3% in 2013; however, each state's status will not be determined until at least November 10, 2014.

 

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Please note: Our explanation that are provided on our web site for "How to Calculate Futa and Suta taxes" are only meant to provide general guidance and estimates about the payroll process. They should not be relied upon to calculate exact taxes, payroll or other financial data. You should consult with a professional advisor or accountant regarding your specific payroll concerns.

 


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