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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Things you need to read:(Updated 1/26/2015)
- 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.
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.
Calculating FUTA and SUTA tax
Federal Unemployment Rate (FUTA) for 2015
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.
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|
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.
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.