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How to Calculate FUTA and SUTA taxes

Federal Unemployment Rate Change 2015 (read update below)

FUTA is an acronym for the Federal Unemployment Tax Act, and SUTA stands for State Unemployment Tax Authority.

The Federal Unemployment Tax Act, or FUTA, is one of several payroll taxes that employers must pay on their employees. The tax provides for payments of unemployment compensation to employees who have lost their job. Unlike the state and federal income taxes withheld from an employee's paycheck, paying FUTA taxes is the responsibility of the employer.

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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. However by paying state unemployment timely you are allowed a credit up to (for i.e. 5.4% for Florida) which brings your Futa tax to $42 per employee. See explanation below.

    Paying and Reporting Unemployment Taxes

    Generally, FUTA tax liability that exceeds $500 should be paid quarterly to the IRS. You may carry over amounts of $500 or less into the next quarter and make the deposit when the balance exceeds $500. Employers must report their FUTA tax liability annually to the IRS on Form 940. Circular E contains detailed instructions on paying and reporting federal unemployment tax.

    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 provided your SUTA is paid in a timely manner. In the event your SUTA tax is less than 5.4%, you still get the maximum full credit against the FUTA tax. 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. Each state has its own new employer rate for new businesses. The length of time that new employers are subject to this rate also varies. Contact your state unemployment office for information on new employer rates.

Federal Unemployment Rate (FUTA) for 2015

The Federal Unemployment Tax Act (FUTA) tax rate is 0.6% of taxable wages paid, or $42 per employee per year.

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 2014.

Note: DOL runs the loan program and announces any credit reduction states after the November 10 deadline each year. DOL has information about the credit reduction states and loan balances on the UI Statistics page of its Department of Labor website.

Employers in the following states will be subject to a reduction in FUTA credit on their IRS Form 940 for 2014:

Credit Reduction Total FUTA Rate 2014
California 1.2% 1.80%
Connecticut 1.7% 2.30%
Indiana 1.5% 2.10%
Kentucky 1.2% 1.80%
New York 1.2% 1.80%
North Carolina 1.2% 1.80%
Ohio 1.2% 1.80%
Virgin Islands 1.2% 1.80%

Source U.S. Department of Labor

Employers who think they may be in a credit reduction state should plan accordingly for the lower credit. The IRS includes the credit reduction states, the applicable credit reduction rates, and an example in the Schedule A (Form 940) (PDF), Multi-State Employer and Credit Reduction Information. The Instructions for Form 940 (PDF) also has information about the credit reduction and deposit rules.

Source IRS


Following are several of the more impactful provisions in the President's budget proposal for FY 2016:

The net federal unemployment tax rate for 2016 would increase from 0.60% to 0.80% of taxable payroll, and the taxable wage limitation would remain $7,000 for 2016. The federal unemployment tax payable would effectively increase from $42 per full-time employee to $56 per full-time employee for 2016 only.

An employer's guide to the Administration's fiscal year 2016 budget

Repeal of FICA tip credit

Currently, food and beverage businesses are allowed to claim a nonrefundable business tax credit for the employer's share of Social Security and Medicare (FICA) taxes paid on the portion of employee tips in excess of $5.15 per hour (after including the employee's non-tip wages).

The budget report states that this credit is inefficient and inequitable and encourages business to pay employees in the form of tips rather than wages and has had done little to improve employer compliance with the tip reporting requirements. Accordingly, it is proposed that this business tax credit be repealed effective January 1, 2016.

The Department of Labor will announce in November 2015 whether additional 2015 FUTA tax rates will apply in certain states. Employers in credit reduction states will pay their increased 2015 FUTA taxes with their 2015 IRS Form 940 filed in January 2016.

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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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