If you’re an employer who is 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 employers are 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 impacts 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’s impacted by t certain fringe benefits, like health reimbursement arrangements (HRAs) and stipends.
What is FUTA?
FUTA is a federal 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 compensation, benefits, and resources to find a job.
Social Security and Medicare are also payroll taxes, which are paid by both employers and employees. However, only employers have FUTA tax liability. This means that individuals don’t pay them on their annual tax returns, nor have FUTA deductions on their paycheck. 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 key.
Businesses that meet at least one of the following conditions below must pay FUTA taxes2:
- In the current or previous year, the employer paid their employees a salary of at least $1,500 during any calendar quarter.
- 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.
Household employers, meaning those that hire a nanny, babysitter, maid, gardener, housekeeper, etc., are subject to FUTA if they meet the following two conditions3:
- The employer paid a household worker at least $1,000 in cash wages in any calendar quarter during the current or previous year.
- 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 conditions4:
- You paid your farm workers or agricultural employees $20,000 or more in cash in any calendar quarter during the current or previous year.
- You employed ten or more agricultural workers during some part of the day, even if not at the same time, 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 laws.
- Religious, educational, scientific, charitable, or other tax-exempt organizations
- Services performed by state or local government parties
- Self-employed individuals (as they’re ineligible to receive unemployment benefits)
- Annual wages paid to an employer’s spouse, child under the age of 21, or parents
- Annual wages paid to independent contractors
What is the 2023 FUTA tax rate?
The current FUTA tax rate for 2023 is 6%. Congress hasn’t changed the rate since 1983. There are also state unemployment taxes (SUTA)1, which vary based on where your employees work.
While it may seem complicated at first, calculating your FUTA tax liability is simple. You pay taxes on the first $7,000 of an employee’s wages in a calendar year (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 2023 (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 tax rate could reduce to 0.6%, but credit can vary.
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.
The chart below shows the 2023 FUTA tax calculation for a company with multiple employees in a single quarter:
FUTA tax rate
Total FUTA liability for Q1
Total Q1 wages: $12,000
Eligible Q1 wages: $7,000
Total Q1 wages: $5,000
Eligible Q1 wages: $5,000
Total Q1 wages:
Eligible Q1 wages: $7,000
(($7,000 + $5,000 + 7,000) x 6% = $1,140)
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 pay5 your taxes every quarter if you owe at least $500 in a quarter. 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. 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%6 of your unpaid taxes if you have a late payment.
Even though you make quarterly payments, 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 taxes7. The IRS will consider your paper Form 940 on time if it has the correct address and you postmark it before the due date.
If you’re a household employer, you can file your FUTA taxes using Form 1040 instead of Form 940.
You must file Form 940 electronically or via mail by 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 2021 Form 940, use 2022’s reporting details.
How FUTA applies to health reimbursement arrangements (HRAs) and stipends
As an employer, you may be wondering how FUTA is impacted by employee benefits. While this will vary based on the benefit, there are many fringe benefits you can offer that are considered “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 look at how FUTA is affected by two fringe benefits for workers: HRAs and stipends.
An HRA is an employer-funded health benefit approved by the IRS. 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 function as an alternative to group health insurance by enabling employees to be reimbursed to individual health plans. Integrated HRAs, or group coverage HRAs (GCHRAs), integrate specifically with group health plans as a supplemental benefit for extra coverage.
HRAs are considered an excluded fringe benefit by the IRS. 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 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 an employee’s paycheck on a regular or one-time basis.
Because stipends are extra income, like commissions and bonuses, 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 the necessary state and federal taxes.
As an employer, correctly calculating, paying, and filing payroll taxes is essential to running a compliant business. While unemployment taxes 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 to be educational in nature and shouldn’t be taken as tax advice. If you’re unsure if you’re calculating and reporting your business taxes correctly, you don’t have to tackle it alone. Contact a tax advisor, CPA, or other financial professional for assistance and tax filing services for your organization.