The unemployment rate in America is hovering around 4 percent right now - much lower than it used to be following the 2008 financial crisis.
Still, there will always be a few people on the unemployment lists. The FUTA tax is the government's way of making sure those people can get unemployment when they need it.
As a business owner, it's important that you understand this tax so you'll know how much you need to pay each year. The amount of tax you pay depends on your employees' salaries, but as with all tax issues, it can get complicated.
To simplify things for you, we've put together this essential guide to understanding the FUTA tax and how it affects your business. Read on to find out everything you need to know.
What is the FUTA Tax?
FUTA stands for Federal Unemployment Tax Act. This is the law that maintains that employers must pay an unemployment tax.
This tax is paid only by employers - it's not withheld from employee's wages. A FUTA form needs to be filed once a year, and the tax needs to be deposited quarterly.
The specifics of unemployment depend on what state you're in. However, this tax provides funding for the government to oversee the unemployment program in each state.
State unemployment taxes are separate from FUTA. In some states, these taxes are called SUTA (State Unemployment Tax Act) taxes, reemployment tax, or unemployment insurance.
Sometimes, a state may not have enough to cover unemployment benefits for everyone who's collecting them. In these cases, that state will borrow from the federal government to pay unemployment.
FUTA taxes create the pool of money that the state can borrow from. It's a sort of insurance policy to make sure that each state always has enough.
When unemployment rates are high, the FUTA money can also be used to pay half of the extended unemployment benefits that are being collected.
History of the FUTA
This tax act came out of the Great Depression. One-quarter of the workers in the U.S. were unemployed in 1932, and something needed to be done.
President Roosevelt created a Committee on Economic Security in 1934 to find a way to protect people from unemployment disasters like that in the future. Unemployment insurance was an important part of this goal.
Unemployment was a way to help lessen the burden of welfare programs, while still making sure that people who were involuntarily unemployed could get by. In 1939, the Federal Unemployment Tax Act was passed to help make this happen.
Who Has to Pay FUTA?
Any company that pays over $1,500 in employee wages per quarter has to pay this tax. Or, if your business has one or more employees on payroll for a day (or a partial day) for 20 or more weeks, you'll have to pay FUTA.
In short, this tax applies to all but the smallest businesses.
How Much Will I Pay?
The amount varies based on the year. This year's FUTA tax rate is 6 percent.
Using this year's tax rate, that means that you'll pay no more than $420 for each of your employees.
Are Tax Credits Available?
For most employers, there is an available tax credit for the FUTA tax that they are eligible for.
This means you can pay a lower tax rate, which can be a huge help to small businesses. The credit is for up to 5.4 percent of the tax. However, there are other credits that are available for less than the maximum amount.