Federal Unemployment Tax Act, or FUTA

The Federal Unemployment Tax Act refers to the employment or payroll tax that is paid solely by the employers. It was created under the Section 904, of the Social Security Act in 1935, and also established Social Security old age and disability benefits. While this kind of tax is paid by employers, it is mainly based on the salary or wages of the employees.
You must pay FUTA on employees who aren’t farm workers or household employees if;
1. You paid wages of more than $1500 in any calendar quarter of 2016 or 2015, or
2. You had 1 or more employees for part of a day for more than 20 weeks in 2016 or 2015
You must pay FUTA on household employees if you paid them over $1000 in any calendar quarter in 2015 or 2016.
You must pay FUTA on farm workers if
1. You paid more than $20000 to farm workers in calendar quarter in 2015 or 2016, or
2. You employed ten or more during part of a day for 20 or more weeks in 2015 or 2016.
Generally, FUTA tax ends up being about 0.6% of first $7,000 each year of the employee’s salary or wages. This simply means that the maximum cost of the employers for the FUTA each year per employee is about $7,000 x 0.006 ($42). If a certain employee earns $5,000 during the calendar year, his or her cost is $5,000 x 0.006 ($30).
In the actual practice of this payroll processing, the actual percentage is then paid usually 0.6%. This is mainly because the employers primarily receive the credit which is up to 5.4% for the state unemployment taxes that they pay. This means that with the credit for the state unemployment taxes, the business owner would pay 0.6%. Even though most of the small business owners would get full 5.4%, credit, it is still important to carefully check the state unemployment regulation in order to insure the eligibility. The majority of states still charge a certain amount of tax above the .6% to keep the state’s unemployment fund above a certain level, as mandated by the state’s legislature. The federal government will step in with more funds, if necessary, like during the recession in 2011. The state of Texas had approximately $2.003 billion in their unemployment fund as of August 31, 2015, besides the $525 million that is set aside for debt repayments.
Certain income is exempt from the FUTA payroll tax and does not count towards the $7,000 base. Insurance premiums, mileage reimbursements, and some other fringe benefits do not count toward the base. The owners of small business get a couple of breaks primarily from IRS on the FUTA taxes. If the tax is less than $500 it can be carried over to the next quarter. If the tax owed is not more $500 then the employer wait to pay it till when they file the 940 for the year. IRS requires the businesses to pay the FUTA taxes on quarterly basis, otherwise.
Another way an employer may be exempt for FUTA is family members might be exempted from the FUTA payroll tax. Children who are mainly employed by their own parents, parents who are employed by their children, as well as spouses who are employed their spouses may be exempted. This exemption requires more research to make sure it is applicable for your situation. Please consult with your accountant or financial advisor.
The Credit Deduction
The credit against Federal Unemployment Tax may be reduced once a certain state that has outstanding advance or loan. When the states lack funds to pay the UI benefits, they might get loans coming from federal government. In order to assure that the loans are repaid in accordance with the Title XII of Social Security Act, the federal government is entitled to recover the money by means of reducing FUTA credit that it gives to the states, and in return employers.