What is the FUTA? How to Calculate in 2024

As an employer, you’ll need to hire employees as your business grows. And anytime you hire employees in the United States, you need to pay employment taxes, including those required by the Federal Unemployment Tax Act (FUTA). This tax provides funds for paying workers unemployment compensation after they have lost their jobs.

The Internal Revenue Service (IRS) requires any organization with employees to file a Form 940, which is an annual form filed with the IRS for any business with one or more employees. Essentially, this Form 940 reports the organization’s annual FUTA tax. 

Keep reading to learn more about your FUTA tax obligations and potential penalties for non-compliance.

What Is FUTA?

FUTA tax provides funds for paying unemployment compensation to workers who have lost their jobs through no fault of their own, such as if an employee is terminated for lack of performance or if the company lays off several workers, such as in a reduction in force. FUTA does not apply if an employee voluntarily quits or, in most cases, if they are terminated for cause.

FUTA tax is paid by the employer only.  No portion of the FUTA tax is withheld from your employees’ paychecks. In this way, it is distinct from other United States payroll taxes like medicare or social security. 

The amount of FUTA tax you pay is based on your company’s annual payroll. According to the IRS, the FUTA tax rate is 6.0%. The tax applies to the first USD 7,000 of wages for each employee during the year. This USD 7,000 is referred to as the federal or FUTA wage base. 

Taxable income comprises salaries or wages, bonuses, commissions, sick pay, vacation allowances, and employee contributions to retirement plans. Additionally, you may have some other exemptions or inclusions based on the state where your organization is located.

Let’s look at an example:

Company Alpha employs 20 individuals. Each of these 20 employees earns an annual taxable income of USD 50,000, bringing the total wages to USD 1.0 million.

In such a case, FUTA is only applied to the first USD 7,000 of each employee’s wages. Therefore, the company’s annual FUTA tax will be 0.06 x USD 7,000 x 20 = USD 8,400. The employer will be required to submit USD 8,400 in FUTA taxes to the IRS. 

To report your FUTA taxes to the IRS at the beginning of each year, you must file a Form 940 with the IRS.

Who Is Required to Pay FUTA Taxes?

Not all organizations are required to pay FUTA taxes and file a Form 940.  However, according to the IRS, if you meet one of the following criteria, then you’re responsible for filing a Form 940, for example, for 2024 if:

• Your company paid wages of USD 1,000 or more to employees in any calendar quarter during 2023 or 2024 (or other applicable years).
• Your organization has one or more employees for at least some part of a day in any 20 or more different weeks in 2023 or 20 or more different weeks in 2024 (or other applicable years). Be sure to count all full-time, part-time, and temporary employees. However, don’t count partners if your business is a partnership.

Additionally, specific tests exist for household employees and farm workers. For example, you may enjoy certain partial exemptions for these types of workers that other employers don’t enjoy.

Am I Also Obligated to Pay State Unemployment Insurance (SUTA)?

You may owe state unemployment tax in addition to FUTA, depending on where your organization is located. To learn more about your state unemployment tax obligations, you can review the U.S. Department of Labor’s Contacts for State UI Tax Information and Assistance.

If you paid wages subject to SUTA, you may receive a credit of up to 5.4% of FUTA taxable wages when you file your Form 940. If you’re entitled to the maximum 5.4% credit, the FUTA tax rate after the credit drops to 0.6%. 

You may be entitled to the maximum credit if you paid your SUTA taxes in full and timely, and your state isn’t a credit reduction state, which is a state that took loans from the federal government to meet its state unemployment tax liabilities but has not yet repaid those loans. 

Keep in mind that although unemployment benefits for your former employees are paid by the states, the federal government provides a “backstop” by collecting FUTA taxes, helping the states meet their financial obligations. 

How Do You Report Your FUTA Tax Payments?

If you’re obligated to pay FUTA tax, you’re required to file a Form 940. This requirement stands no matter if any employee quits, is fired, or otherwise can claim unemployment benefits.

Form 940 is a single-page return listing all payments to employees, less any payments exempt from the Federal Insurance Contributions Act (FICA). Various payments are exempt from FUTA calculations, including fringe benefits (such as those for meals or lodging), group term life insurance, employer contributions to retirement or pension plans, dependent care (up to certain limits), and other payments, such as worker’s compensation payments.

If your organization has employees in more than one state, then you’ll need to complete Form 940’s Schedule A, to calculate any credit reductions for wages under those states’ unemployment compensation laws. 

An organization files its Form 940 at the beginning of the calendar year. For example, if you’re filing a Form 940 for 2024, the deadline to file is January 31, 2025. If the due date falls on a Saturday, Sunday, or legal holiday, you must file your Form 940 no later than the next business day.

However, if you deposited all your FUTA tax when it was due, you may file Form 940 by February 10, 2025.

If the IRS receives your Form 940 after the due date, the IRS will treat your Form 940 as filed timely if the “envelope containing Form 940 is properly addressed, contains sufficient postage, and is postmarked by the U.S. Postal Service on or before the due date, or sent by an IRS-designated private delivery service (PDS) on or before the due date.”

If you don’t satisfy these requirements, then your Form 940 will be considered filed on the date the IRS actually receives it.

When Do I Make FUTA Payments?

Although Form 940 is filed annually, you must make quarterly tax deposits during the year to satisfy your FUTA obligations. 

If your quarterly FUTA tax is more than USD 50 annually, then you must make at least one quarterly payment. You must make this deposit by the last day of the month after the end of the quarter. 

For example, if you realize USD 1,000 in FUTA tax based on your payroll from April through June, then you must make your quarterly payment no later than July 31st. 

If your total quarterly FUTA amount is less than USD 500, then it carries over to the next calendar quarter and is added to your FUTA liability for that next quarter.

The FUTA tax payment due dates are as follows:

• Q1: April 30th
• Q2: July 31st
• Q3: October 31st
• Q4: January 31st

You can make your payments through the Electronic Federal Tax Payment System (EFTPS), which is a free payment service provided by the U.S. Department of the Treasury. 

Where Do I File My FUTA Tax Payment Reporting?

You can file your Form 940 on paper to the appropriate address on the form’s instructions. However, you can also file electronically through the IRS’ e-file program. Additionally, your accountant or payroll service provider can file your Form 940 on your behalf.

What Happens If I File My Form 940 Late?

If you file your Form 940 late, you are typically subject to a penalty of 5% per month (plus interest) of any unpaid balance due. 

How Do I Avoid Penalties When Reporting My FUTA Tax Payments?

To avoid any unwanted federal penalties and interest, keep the following in mind:

• Complete and sign your Form 940
• File your Form 940 by the deadline
• Ensure that your quarterly payments are paid timely (and in the right amount)

If you complete the above tasks completely, correctly, and timely, then you should be in compliance, avoiding any necessary fines and penalties.

Complying with the Federal Unemployment Tax Act

Like any other U.S. employment taxes, you should understand your FUTA tax obligations, working these requirements into your operational workflow. It’s essential to stay on top of your tax payments and filings, helping you stay compliant and avoid any costly penalties.

Want to learn more about FUTA and other U.S. employment taxes? Horizons can advise on all matters of US employment compliance.