What is FUTA, and how does it impact your business?

When running a business, employers must understand the ins and outs of payroll taxes. If you’re an employer starting to hire workers for your small business, you’re likely already familiar with Social Security and Medicare payroll taxes. But, there’s another tax that you may be responsible for: the Federal Unemployment Tax Act, or FUTA.

Unlike Social Security and Medicare, which impact both employers' and employees’ tax liability, the FUTA tax only affects employers. So, while many employees may not have heard of it, employers must know their FUTA tax responsibility to avoid costly penalties from the Internal Revenue Service (IRS).

This blog will explain what FUTA is, what businesses must pay and file it, the current tax rate, and how it impacts certain fringe benefits, like health reimbursement arrangements (HRAs) and stipends.

Takeaways from this blog post:

• The Federal Unemployment Tax Act (FUTA) is a federal law that requires most employers to pay a payroll tax that funds unemployment benefits.
• The 2024 FUTA tax rate is 6% of the first $7,000 paid to each employee, with the possibility of receiving a credit based on state unemployment insurance taxes. Employers must report and file with FUTA taxes annually using Form 940.
• Nontaxable fringe benefits such as group term life insurance, health reimbursement arrangements (HRAs), and retirement plans aren’t subject to FUTA taxes.
• The IRS considers employee stipends taxable wages, meaning they’re subject to FUTA and require proper reporting and withholding of state and federal taxes.

What is FUTA?

FUTA is a federal-level law that requires most American businesses to pay a payroll tax annually or quarterly. The federal government created FUTA to raise money for unemployed individuals nationwide, giving them access to unemployment benefits, compensation, and resources to find a job.

Social Security and Medicare are also payroll taxes, which employers and employees pay. However, only employers have FUTA tax liability. This means that individuals don’t pay them on their annual tax returns, nor do they have FUTA deductions on their paychecks. But, employers use their employees’ wages to determine how much they owe in FUTA taxes.

Which businesses need to pay FUTA?

If a company has employees, they’re likely subject to FUTA taxes. But different business types have specific tax requirements, so knowing which one you fall under is critical.

Businesses that meet at least one of the following conditions below must pay FUTA taxes¹:

1. In the current or previous year, the employer paid their employees a salary of at least $1,500 during any calendar quarter.
2. The employer has one or more full-time, part-time, or temporary employees for at least some part of a day during 20 or more weeks throughout the current or previous year. If your organization is a partnership, you can exclude partners, as partners aren’t employees.

Household employers, meaning those that hire a nanny, babysitter, maid, gardener, housekeeper, etc., are subject to FUTA if they meet the following two conditions²:

1. The employer paid a household employee at least $1,000 in cash wages in any calendar quarter during the current or previous year.
2. The employee performs domestic services work in a private home, local college club, or local college fraternity chapter, and the employer controls how the person performs the work.

If you’re a farm or agricultural employer, you must pay FUTA taxes if you meet either of the below conditions²:

1. You paid your farm workers or agricultural employees $20,000 or more in cash in any calendar quarter during the current or previous year.
2. You employed ten or more agricultural employees during some part of the day, even if not simultaneously, during any 20 or more different weeks in the current or previous year.

The following are a few exemptions from FUTA:

• Indian tribal governments
  • They are exempt from FUTA as long as they’ve participated in the state unemployment system for the entire calendar year and are compliant with current unemployment insurance laws.
• Religious, educational, scientific, charitable, or other tax-exempt organizations
• Services performed by employees of a state government or political party of a state
• Self-employed individuals (as they’re ineligible to receive unemployment funds)
• Annual wages paid to an employer’s spouse, child younger than 21, or parents
• Annual wages paid to independent contractors

What is the 2024 FUTA tax rate?

The current FUTA tax rate for 2024 is 6%³. Congress hasn’t changed the rate since 1983. There are also state unemployment taxes (SUTA), which vary based on where your employees work⁴.

While it may initially seem complicated, calculating your FUTA tax liability is simple. You pay taxes on the first $7,000 of an employee’s wages in a calendar year period (excluding exempt payments). Any amount an employee earns after the first $7,000 isn’t liable to FUTA tax.

This means the highest amount you owe in FUTA taxes per employee in 2024 (without a tax credit) is $7,000 x 6% = $420.

Another factor you must consider with FUTA is SUTA. If you make your SUTA deposits on time, you can receive a tax credit toward FUTA. The maximum credit amount is 5.4%, meaning your FUTA rate could be 0.6%, but the credit varies.

How much FUTA credit you’re eligible to receive depends on what state your employees live and work in and if your state has an outstanding balance of federal unemployment loans. The Department of Labor reviews this information annually and determines which states will receive the full 5.4% FUTA tax credit.

For 2024, California, Connecticut, New York, and the U.S. Virgin Islands have a Title XII advance balance from the federal government. If these states don’t repay their outstanding balance by November 10, 2024, employers in these states could see fewer tax credits for FUTA.

The chart below shows the 2024 FUTA tax calculation for a company with multiple employees in a single quarter:

If the example company is eligible for the entire 5.4% tax credit, their total FUTA tax liability for Q1 would only be $114 (($7,000 + $5,000 + 7,000) x 0.6% = $114).

How do employers pay and report FUTA taxes?

To fulfill your FUTA tax obligations, you must pay quarterly taxes if you owe at least $500 in a quarter⁵. If you owe less than $500 in a quarter, the IRS will allow you to roll the amount over to the next quarter until your total is $500 or more. At this point, you’ll need to pay your FUTA tax.

The deadline date for payments is one month after the previous quarter ends. For instance, if you have taxes due for Q4, which ends on December 31, you’ll need to pay the total amount by January 31. If your deposit day falls on a weekend or legal holiday, you can make your deposit on the following business day.

The IRS requires you to use the Electronic Federal Tax Payment System (EFTPS) to send payments. You may be subject to a penalty between 2% and 15% of your unpaid taxes if you have a late payment⁶. Therefore, it’s vital to pay your business taxes on time.

Even if you make payments quarterly, you’ll file your reports annually. When it’s tax time, employers can use either the electronic or paper version of Form 940 to file their FUTA taxes. The IRS will consider your paper Form 940 on time if it has the correct address and you postmark it before the due date. Starting in 2024, organizations with ten or more returns of any kind during a calendar year (including W-2s and other forms) must file electronically.

If you’re a household employer, you can file your FUTA taxes using Form 1040 instead of Form 940.

The filing deadline for Form 940 (whether you’re submitting electronically or via mail) is January 31 of the following year. If you’ve made all your tax payments on time during the year, you’ll automatically receive a ten-day extension to file, which would be February 10 of the following year.

If you need to file an amendment to Form 940 for a previous year, you’ll use the following year’s information to make any changes. For example, if you need to amend your 2022 tax form, you can use 2023’s reporting details.

How FUTA applies to health reimbursement arrangements (HRAs) and stipends

As an employer, you may wonder how employee benefits impact FUTA. While this will vary based on the benefit, the IRS considers many fringe benefits you may offer as “excluded benefits.” Excluded benefits include group term life insurance, health savings accounts (HSAs), meals, employee stock options, retirement plans, and more.

According to the federal government, most excluded benefits aren't subject to federal income tax withholding, Social Security, Medicare, Railroad Retirement Tax Act (RRTA), or FUTA taxes. While there are a few exceptions, this puts business owners in a great position to offer tax-advantaged perks to their employees.

Below, we’ll examine how federal unemployment taxes are affected by two fringe benefits for workers: HRAs and stipends.

HRAs

An HRA is an IRS-approved, employer-funded health benefit. With an HRA, employers reimburse their employees tax-free for qualified medical expenses and, depending on the HRA, individual health insurance premiums.

The qualified small employer HRA (QSEHRA) and the individual coverage HRA (ICHRA) are stand-alone HRAs, meaning they are an alternative to group health insurance by enabling employers to reimburse employees for individual health plans. Integrated HRAs, or group coverage HRAs (GCHRAs), integrate specifically with group health plans as a supplemental benefit for extra coverage.

The IRS considers HRAs an excluded fringe benefit⁷. Business owners make contributions to the HRA on a pre-tax basis, and the payments are tax deductible. Employer contributions are also exempt from payroll taxes, including FUTA.

Moreover, employees are exempt from paying income taxes on their HRA money as long as they have a health insurance policy that meets minimum essential coverage (MEC).

Stipends

Stipends are allowances offered to employees to help them pay for whatever lifestyle benefits they choose. While there are various stipends you can offer, such as remote work, professional development, transportation, and wellness stipends, they are essentially gross wages added to employee paychecks on a regular or one-time basis.

Depending on how an organization designs its stipend program, these benefits can be taxable or tax-free. Most stipends are taxable and are, therefore, the IRS considers them extra income, similar to commissions and bonuses. This means they’re counted as regular taxable wages and are subject to FUTA. You must also report the stipend money on your employees’ Form W-2 and withhold state and federal taxes.

Conclusion

As an employer, correctly calculating, paying, and filing payroll taxes is essential to running a compliant business. While unemployment insurance payments may not be top of mind for your organization, taking the necessary steps to meet your FUTA tax obligations can keep your risk of penalties low and your company operating smoothly.

This article is intended for educational purposes only, meaning you shouldn’t take it as tax advice. If you’re unsure if you’re calculating and reporting your employer taxes correctly, you don’t have to tackle it alone. Contact a tax advisor, CPA, or other professional for financial assistance and tax filing services for your organization.

1. https://www.irs.gov/taxtopics/tc759

2. https://www.forbes.com/advisor/business/form-940-instructions/#:~:text=Who%20Pays%20FUTA%20Taxes%3F

3. https://www.irs.gov/pub/irs-pdf/p926.pdf

4. https://www.forbes.com/advisor/business/what-is-suta-tax/

5. https://www.irs.gov/taxtopics/tc759#:~:text=When%20and%20how%20must%20you%20deposit%20your%20FUTA%20tax%3F

6. https://www.irs.gov/payments/failure-to-deposit-penalty

7. https://www.irs.gov/publications/p15b#:~:text=federal%20income%20tax.-,Accident%20and%20Health%20Benefits,-This%20exclusion%20applies