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Unemployment (FUTA) taxes
In addition to paying FICA taxes, you will also likely owe federal unemployment (FUTA) taxes, named for the Federal Unemployment Tax Act. These taxes are paid into a federal fund for unemployment compensation.
Since employees do not pay federal unemployment taxes, you do not withhold them from income.
You owe federal unemployment taxes if you paid at least $1,500 in wages during any calendar quarter in the current or previous year. See IRS Pub. 15 for rules on paying unemployment taxes for household employees or farm workers.
Federal unemployment taxes are levied at the rate of 6.2% on the first $7,000 of employees' income each year, or a maximum of $434 per employee. Since most states also run their own unemployment compensation programs, you will likely pay unemployment taxes in your state. Beginning in 2008, the FUTA tax rate will be 6%.
Generally, you can deduct up to 5.4% of taxable income that you pay in state unemployment taxes from the amount of federal unemployment taxes you owe.
If eligible for the full deduction, your maximum federal unemployment tax liability on the first $7,000 of income is 0.8%, or the 6.2% federal rate less the 5.4% credit. (Note: Amounts of income that are subject to state unemployment taxes may be greater or less than $7,000. You should check with your state unemployment-compensation program.)
For example, if you pay a state unemployment tax of 5.4%, you would owe 0.8% on the first $7,000 of income, or $56, in federal unemployment tax. The following table shows hypothetical amounts for federal unemployment taxes on $5,000 and $7,000 of income. Any additional unemployment taxes would be paid to the state unemployment-compensation program:
| Income |
FUTA (6.2%) |
Less: State Tax
Rate (5.4%) |
Net FUTA Paid |
| $5,000 |
$310 |
$270 |
$40 |
| $7,000 |
$434 |
$378 |
$56 |
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Since the IRS assumes you will pay state unemployment taxes at the rate of 5.4%, it requires you to submit 0.8% of your payroll within one month of the end of each calendar quarter (April 30 for the January to March quarter, for example). You should stop paying FUTA taxes on behalf of employees whose year-to-date salaries exceed $7,000.
You report federal unemployment taxes on IRS Form 940 or Form 940-EZ. For more information on calculating federal unemployment taxes, see IRS Pub. 15. For additional information on the federal unemployment tax, see Chapter 23 of the U.S. tax code. You can find the tax code at the Web site of the Legal Information Institute (LII) of Cornell University.
Next Topic: Withholding payroll tax
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