Federal Unemployment Tax Obligations for Businesses: A Brief Guide

Employers have to pay Federal Unemployment Taxes (FUTA) if the wages paid per employee exceeds $7000 for the calendar year, as per IRS regulations for 2021. If you’re using a paystub generator for DIY payroll making, don’t forget to consider this aspect of payroll taxes.

Understanding Federal Unemployment Taxes (FUTA)

Federal Unemployment Taxes (FUTA) passed in 1939 is a federal law raising revenue for administering the unemployment insurance & job service insurance in every US state. Employers must pay the annual or quarterly FUTA that is a part of payroll taxes. The revenue raised from FUTA is utilized for funding unemployment benefits.

FUTA is imposed on employers, just like FICA is for employees. Employers paying their state employment insurance can receive nearly 5.4% of federal tax credit and a FUTA tax rate of 0.6%. This simply means that you should care for FUTA along with using a check stubmaker.

When does your business owe FUTA?

Here are the two criteria that define if your business should pay FUTA or not:

• At least $1500 is paid as wages during the calendar quarter or last calendar year.
• It had at least one full-time, part-time, or temporary employee for at least some part of a day in any 20 or more different weeks in the current or previous year. Refer more on this by IRS.

State Unemployment Taxes (SUTA) vs. Federal Unemployment Taxes (FUTA)

Many USA states are collecting additional unemployment taxes from employers and it is labeled as SUTA. SUTA ranges from 2% to 5% of per employee wages.

If you’re already paying SUTA, you’ll feel fewer burdens for FUTA. When you pay SUTA completely on time, a tax credit of up to 5.4% of taxable income can be enjoyed by employers. The respective amount is deducted from the FUTA taxes owed by employers.

This simply means that if an employer qualifies for the highest credit will have to pay a net tax rate of 0.6% i.e. 6% – 5.4%. It drills down to $42 as per employee FUTA tax. But, those firms who don’t qualify for SUTA don’t qualify for FUTA credits either.

Just like you take the benefit of a check paystub maker, you can reap benefits from FUTA too.

How to control your unemployment tax costs?

1. ‘Buy down’ unemployment tax rate

Some employers might be unaware of this facility, but certain states allow employers to ‘buy down’ unemployment tax rates annually. Run an eligibility check for your business so that you can save substantial unemployment tax dollars.

2. Avoid frequent layoffs

Your unemployment payments are partly based on the number of employees filing unemployment claims. Be very careful while hiring employees if you’re looking to fill temporary needs. Look out for reliable and permanent employees to fulfill your staffing needs. It will directly impact your layoffs. You’ll at least stay assured that you don’t have to hunt for employees time and again.

3. Handle terminations well

Make employee termination decisions carefully & ensure that you provide severance and outplacement benefits. By facilitating severance, you may reduce or delay the start of unemployment insurance benefits. Similarly, effective outplacement services speeds-up the end of unemployment insurance benefits as the claimant find a new job.

Create a Paystub or Manage Taxes Online

No matter if you want to create a paystub or manage employer duties with a W2 Form online, you should be well aware of your duties as an employer. If your state wants you to file FUTA, it’s important to know how to play your role efficiently. We hope this read adds up to your knowledge.