Social Security Rate
PEO Arrangement Compared to Outsourcing Payroll
Federal Unemployment Tax Act (FUTA) Definition
The Federal Unemployment Tax Act (FUTA), defined as a tax that an employer alone must pay.
Although this tax is paid by the employer it is based solely on the amount of work and pay per employee for that particular company. As said before, the Federal Unemployment Tax act is a tax that is paid by employers as a safeguard against the unemployed losing their funds. As a benefit to unemployed workers during the time they don’t have employment, FUTA is a federally implemented and controlled construct.
Federal Unemployment Tax Act FUTA Meaning
FUTA is different from FICA
taxes and Social Security
taxes because the latter two are paid half by employer and the other half by the employee. FUTA however, is based on an employees wages, but it is paid only by the employer. Luckily for employers the federal unemployment rate is quite low, hovering around 0.8%. Included with the federal unemployment tax rate is the fact that an employer only has to pay for the first $7,000 per year.
Federal Unemployment Tax Act (FUTA) Example
When calculating the payment to be realized for the unemployment tax, it is important to understand what taxable wages are. Taxable wages are the income that has the ability to be taxed. Other wages are non-taxable (unable to be taxed). Therefore, when the Federal Unemployment Tax states that the first $7,000 wages are taxable, that means that any wages over $7,000 are not taxable. For example, if an employee in a company was earning $10,000, only $7,000 would be taxed at the rate per working employee. At the same time, one must also know the number of taxable employees, as well as the rate that the tax will be implimented. For example, Bob is the CFO for Mundler Diffin, a company that specializes in the sale of construction paper. The company has 40 employees who all make on average $40,000 a year plus commission. Bob calculates Mundler Diffin's unemployment tax liability as follows:
40 employees * $7,000 * 0.8% = $2,240
Note: If each employee made less than $7,000 the rate would be multiplied by the total amount that they earn up to $7,000 to be paid by the employee.
The prime benefactors of the Federal Unemployment tax are obviously the employees. They receive a monetary benefit that creates a cushion against prolonged unemployment. In order for the employees to benefit from the FUTA, they have to fall under certain qualifications. Likewise, companies can file for a FUTA credit that gives them the ability to reduce the rate that applies to the unemployment tax. In order for a company to qualify for a FUTA credit, the company must first pay all of the unemployment tax for that year on the due date. Furthermore, companies that are exempt from the Federal Unemployment tax are not a candidate for the FUTA credit. In addition, employees that are exempt from the benefits from the unemployment tax exclude their income from the unemployment tax payment. If the FUTA credit is realized, the going rate for the unemployment payment can drop from 6.2% to .8%.