The Federal Unemployment Tax Act, or FUTA, is a U.S federal law requiring employers to pay a tax that funds unemployment benefits for people who’ve lost their jobs. The tax is paid to the IRS.
While FUTA is specific to US employees, any non-US companies with operations in the country may also be subject to this tax.
How does FUTA work?
FUTA taxes are calculated based on the amount in wages an employer pays during a specific year – up to a maximum of $7,000 per employee. The FUTA tax rate tends to be 6%.
So, as an example, if an employee earns a total taxable wage of $10,000 in one year, the employer will only owe FUTA taxes for $7,000 of that. The total FUTA tax the employer needs to pay then is $7,000 – or $420.
Employers who also pay state unemployment taxes only need to pay 5.4%. So, in the example above, they would pay around $380.
FUTA is usually paid on a quarterly basis, four times a year. The specific due date will depend on the employer’s payroll schedule and tax liability. Generally, though, it tends to be on the last day of the month after of the calendar quarter.
Who needs to pay FUTA?
All employers with employees in the US that meet the relevant criteria are required to pay FUTA taxes.
Employers that pay FUTA taxes are called ‘covered employers.’ The criteria for paying these taxes include:
- a minimum of $1,500 in wages to employees during a single calendar quarter
- at least one employee for any part of the day in at least 20 different weeks in a calendar year
Non-profit or government entities may be exempt from paying FUTA taxes.
Difference between FUTA, SUTA, and FICA
FUTA, SUTA, and FICA are all taxes employers may be subject to in the US. However, they serve different purposes, which can sometimes get confused. Below we outline the definitions of each.
The Federal Unemployment Tax Act, or FUTA, is a federal tax that funds unemployment benefits for workers who’ve lost their jobs. These payments are made to the IRS.
The State Unemployment Tax Act, or SUTA, also funds unemployment benefits for workers who’ve lost their jobs – but at a state rather than a federal level. This means each state will have its own rules and regulations regarding these tax requirements. This tax is paid to the state’s workforce agency.
FICA is the Federal Insurance Contributions Act. This tax funds social security and Medicare benefits for workers and their families. These payments are made to the IRS.
Managing unemployment insurance laws on a global scale
Unemployment insurance policies like FUTA are not unique to the US. Many other countries have similar laws. They are designed to help minimize the economic impact of unemployment.
Companies managing a global workforce can face a lot of challenges in terms of unemployment insurance laws. Difficulties can range from understanding and tracking these requirements and regulations in each country, to accurately calculating these taxes and keeping things organized at an administrative level.
Partnering with a payroll payment distribution platform is one way to mitigate these bumps. These providers can help companies with
- providing a global payroll solution if needed
- ensuring compliance with regulations for each country
- staying up to date with any regulatory changes
- managing costs associated with different countries’ unemployment and insurance policies