In the same way that employees pay taxes to the state and federal governments, employers and their organizations are responsible for paying certain taxes as well.
One of these is the federal unemployment tax. The federal unemployment tax (FUTA) funds the federal government’s unemployment account. This account serves as a resource for individuals who leave their organizations involuntarily; ie, those who may have been fired or laid off.
Like many taxes and rates, the federal unemployment tax rate changes from year to year. Let’s discuss what this tax does, and what the rate is for federal unemployment taxes in 2020.
What’s the federal unemployment tax rate in 2020?
Let’s get this question out of the way quickly for those needing only one answer: the FUTA rate in 2020 is six percent.
The federal unemployment tax rate is not the same as the state unemployment tax rate. Depending on where you are located, you may be responsible for paying both.
The FUTA is determined based on employee wages and salaries. It applies to the first $7,000 you pay each employee as part of their earnings per year.
Who pays FUTA?
Taken verbatim from the IRS Tax Map, companies can use the following guidelines to determine if they’re required to pay the FUTA:
- General test.You’re subject to FUTA tax in 2019 on the wages you pay employees who aren't farmworkers or household workers if:
- You paid wages of $1,500 or more in any calendar quarter in 2018 or 2019, or
- You had one or more employees for at least some part of a day in any 20 or more different weeks in 2018 or 20 or more different weeks in 2019.
- Household employees test.You’re subject to FUTA tax if you paid total cash wages of $1,000 or more to household employees in any calendar quarter in 2018 or 2019. A household employee is an employee who performs household work in a private home, local college club, or local fraternity or sorority chapter.
- Farmworkers test.You’re subject to FUTA tax on the wages you pay to farmworkers if:
- You paid cash wages of $20,000 or more to farmworkers during any calendar quarter in 2018 or 2019, or
- You employed 10 or more farmworkers during at least some part of a day (whether or not at the same time) during any 20 or more different weeks in 2018 or 20 or more different weeks in 2019.
How do employers report the FUTA?
Employers, and employers only, are responsible for filling out and submitting Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return.
This form is due January 31 for the previous year’s wages, although the actual date you pay could be sooner.
Be sure you’re filling out the 940, which is for reporting and making payments annually, as opposed to the 941, which is for companies that wish to make their FUTA payments and send in reports quarterly.
Employers can file the 940 online, or fill it out and send it through the mail.
How can employers calculate their FUTA payment in advance?
Those who fill out the 940 form will hear back from the IRS regarding what they owe.
If you want to do the math yourself, there are a few ways to approach this. The most common equation is to take the first taxable $7000 and multiply it by the rate of six percent:
Then you multiply this by the amount of employees you have to determine how much you have to pay. This doesn’t always provide the final number, as there are a lot of other things to consider such as whether you can get money credited back to you for paying state unemployment taxes.
Don’t fret the FUTA
While it sounds daunting, it gets easier with time. If you’re confused or the numbers aren’t adding up as you anticipated, consider seeking financial help such as through accounting services.
Are you a small-business owner wondering how all this works? Learn more about small-business finance.