The Federal Unemployment Tax Act (FUTA) provides the legislative authority for the federal government to collect taxes from employers to fund unemployment compensation programs at the state level. Employers in every state must pay unemployment taxes under the Act.

Overview

The federal unemployment tax and state unemployment programs are a cooperative system financed by two different employer taxes. First, state employment security agencies (SESA's) collect quarterly employer contributions (taxes) in order to pay unemployment benefits to eligible, unemployed workers. Secondly, the federal government funds the administrative costs of the employment security programs in each state through the federal unemployment tax (FUTA).

The Federal Unemployment Tax Act (FUTA) provides the legislative authority for the federal government to collect taxes from employers to fund unemployment compensation programs at the state level. Employers in every state must pay unemployment taxes under the Act.

Background

In addition to helping workers and their families, the Unemployment Insurance programs play a key role in helping businesses, communities, and the nation's economy. It was created in 1935 in response to the Great Depression, when millions of people lost jobs. They couldn't buy goods and services, which contributed to more layoffs.

Now, as then, the program helps cushion the impact of economic downturns and brings economic stability to communities, states, and the nation by providing temporary income support for laid off workers.

Tax Calculation

The tax is calculated by multiplying the tax rate times FUTA taxable wages, not to exceed an annual maximum. The gross tax rate, which is 6.2 percent (.062) for 2006, consists of a .2 percent surtax. For 2006, the tax is applied on the first $7,000 of FUTA wages paid to each employee. Although the tax is based on employee wages, federal unemployment taxes are assessed against employers, not employees. Therefore, there is no withholding from employee pay checks for FUTA taxes.

Most employers do not pay the gross FUTA tax because the regulations give employers a 5.4% credit against FUTA taxes for paying state unemployment taxes in full and on time. As a result, most employers will pay a net FUTA tax of .8 percent (6.2% gross minus 5.4% credit).

FUTA Tax Credit Reduction

When state unemployment funds are low, the affected state may borrow from the federal unemployment fund to pay state unemployment claims. When the loans are not paid on time, the federal government will reduce the federal unemployment tax credit, which increases the federal unemployment tax paid by employers in the affected state. The additional FUTA taxes are used to repay the state loans.

State Unemployment Tax Act (SUTA) Dumping Prohibited

SUTA Dumping Prevention Act of 2004 was passed by the United States Congress and signed by the President in August 2004. This law requires each state to enact laws to prevent employers from inappropriately lowering their unemployment insurance contribution rates. The law not only bans SUTA dumping but also imposes heavy penalties on those who engage in or promote such abusive practices.
Some employers and financial advisors have found ways to manipulate state experience rating systems so that these employers pay lower state unemployment taxes than their unemployment experience would otherwise allow. This practice is called SUTA dumping. SUTA dumping frequently involves merger, acquisition or restructuring schemes, especially those involving shifting of the workforce to get a lower unemployment tax rate.

Review the following federal legislation for additional details: http://www.dolir.mo.gov/es/SUTADumpingBill.htm.

Reporting

FUTA taxes are reported annually on Form 940. Generally, employers must file by January 31 of the year following the year for which the report is applicable. Employers who deposit all FUTA tax when due may file on or before February 10 of the following year. Your return will be considered timely filed if it is properly addressed and mailed First Class or sent by an IRS-designated delivery service by the due date.

Depositing FUTA Taxes

Employers who choose not to enroll in the Electronic Federal Tax Payment System (EFTPS) and are not required to use EFTPS must use Form 8109, Federal Tax Deposit Coupon to make each tax deposit. Employers who are required or choose to file using EFTPS will receive instructions from the IRS on how to use the system.

Although Form 940 covers a calendar year, employers may have to make deposits of the tax before filing the return. Generally, FUTA tax must be deposited quarterly with a qualified financial institution or a Federal Reserve Bank if FUTA tax exceeds $500. For example, if your FUTA tax for any of the first three quarters of 2005 (plus any undeposited amount of $500 or less from any earlier quarter) is over $500, deposit it by the last day of the month following the end of the quarter. If it is $500 or less, carry it to the next quarter; a deposit is not required. If your FUTA tax for the fourth quarter (plus any undeposited amount from any earlier quarter) is over $500, deposit the entire amount by January 31, of the following year. If it is $500 or less, you can either make a deposit or pay it with your Form 940 by January 31. (If you deposit it by January 31, you may file Form 940 later, by February 10 of the following year.)

If any deposit due date falls on a Saturday, Sunday, or legal holiday, employers may make their deposits on the next business day.