FUTA and Form 940 are important payroll concepts related to federal unemployment taxes. Today, we’re going to help employers like you understand FUTA and Form 940.
What is FUTA?
FUTA stands for Federal Unemployment Tax Act. This nationwide law gives states the framework on which they run their unemployment benefits programs.
Basically, FUTA is a nationwide tax act that is used to distribute funds to state workforce agencies. If you’ve ever been unemployed, then you’ve relied on FUTA-sourced funds to stay afloat during tough times.
FUTA doesn’t actually fund 100% of state workforce agencies. Instead, FUTA pays half the cost of extended unemployment benefits provided by these agencies. Additionally, FUTA provides a fund from which states can borrow – like during times of unemployment – to pay out benefits.
FUTA Tax and FUTA Tax Rates
All companies must pay taxes to the federal government for unemployment insurance. Employers take these taxes from employee paychecks while also contributing to the tax themselves.
The maximum FUTA tax rate today is 6.0%. That’s actually down from where it’s been in previous years, reaching a peak of 6.2% through 2010 and the first six months of 2011.
The maximum FUTA tax rate may be 6%, but the effective tax rate you’ll pay towards FUTA is much lower. Employers, for example, pay a maximum FUTA tax of $105 per employee per year.
What is Form 940?
Form 940 – or 940 Form – is an IRS form that needs to be submitted annually. This form helps the employer calculate his or her FUTA taxes.
While Form 940 needs to be submitted once per year, your FUTA tax payments need to be paid every quarter.
You can find the latest Form 940 at IRS.gov here: https://www.irs.gov/pub/irs-pdf/f940.pdf. That link is updated with the most recent version of the form every year.
What is SUTA?
If FUTA is the federal unemployment tax, then you can probably guess what SUTA is: it stands for State Unemployment Tax Authority.
SUTA tax rates vary from state to state. However, the bulk of your unemployment insurance taxes are paid to state governments.
Does Everyone Have to Pay FUTA Tax?
Basically, any business that has employees needs to pay FUTA tax. The full burden of FUTA falls onto the employer.
Technically speaking, “having employees” means that you paid more than $1,500 in wages in any quarter in the last two years, or if you had an employee in 20 different weeks of the year. If your business falls into either of these categories, then you’ll need to pay FUTA tax.
How Much Do I Have to Pay in FUTA?
FUTA’s current rate as of 2016 is 6% on the first $7,000 of earnings per employee.
After that first $7,000, there is no additional FUTA tax.
Remember up above where I said most companies don’t pay anywhere close to that amount for FUTA? The reason is that if you pay SUTA taxes (which you most likely do), then FUTA tax is reduced to 0.6% in most states.
The only time you don’t get reduced to 0.6% is if you live in one of 20 states that owe the federal government money for unemployment benefits, in which case companies in these states have less of a reduction.
Nevertheless, even in states that owe the federal government money for unemployment benefits, the highest rate among these states is 1.5% on the first $7,000.
FUTA taxes can feel like a disproportionate expense. After all, if your company has a few highly paid employees, then FUTA taxes will be a very small portion of your expenses.
On the other hand, if you have lots of temporary workers, all of whom make close to minimum wage, then your company will be comparatively harder hit by the FUTA tax.
When Do I Need to File FUTA Taxes?
FUTA taxes must be paid quarterly, with your Form 940 being filed annually.
For the first quarter with January, February, and March, FUTA must be paid by April 30th. The next payment due dates are July 31st, October 31st, and January 31st.
Companies with fulltime annual employees will have the highest share of FUTA taxes in the first quarter, with costs dropping throughout the remaining 3 quarters.
The only time you don’t need to file FUTA taxes quarterly is if your total FUTA obligations per quarter are less than $500.
When Do I Need to File Form 940?
The IRS needs Form 940 by January 31st for the preceding year. You can submit this form by mail or electronically.
If you’re having trouble figuring out how or when to file Form 940, then the IRS has published an excellent guide here explaining everything you need to know about it.
FUTA Versus SUTA Taxes
Taxable wages vary widely from state to state, although very few states use the federal limit of $7,000.
Federal taxes are the same for every business in the state (6.0%). However, states actually break down SUTA from business to business based on your company’s history – like the number of unemployment claims of former workers.
Basically, this means companies that have laid off a large number of workers in recent years will need to pay a higher share of SUTA.
SUTA taxes require you to submit separate paperwork with your state and send payments to different places.
How to Reduce Unemployment Insurance Costs
As mentioned above, the FUTA tax rate is the same for businesses across America: it’s 6.0% (before you pay your SUTA taxes).
You can, however, reduce the amount you pay for State Unemployment Taxes (SUTA). Many businesses see SUTA as just another cost of doing business. But the truth is: there are many easy ways to reduce SUTA taxes that can save thousands for your business every year.
To understand how to reduce SUTA, you need to understand how SUTA is calculated.
All states have a wage cap used for SUTA calculations. Once that limit is reached, you don’t pay SUTA after that amount.
Every time an employee quits (provided they’ve reached the SUTA wage cap) and a new person is hired, then the SUTA obligation starts anew for the newly hired person.
In layman’s terms, this means that high employee turnover can lead you to pay significantly more in SUTA taxes than a company with low employee turnover.
One problem with this is that SUTA doesn’t look at whether an employee quit or was fired, or even if they filed for an unemployment insurance claim after leaving your company. If any of your employees stops working for your company for any reason, and that employee has already reached their SUTA wage cap, then you’ll need to pay SUTA for the replacement employee.
How Is SUTA Calculated?
SUTA may sound like a complicated formula, but it’s actually pretty simple. Here’s what SUTA looks at:
Your company’s assigned SUTA rate is multiplied by your wages paid that are subject to SUTA taxes
Where Does Your Company’s Assigned SUTA Rate Come From?
Your company’s assigned SUTA rate varies widely from state to state, as each state’s SUTA agency uses different rules and rating systems.
However, there are certain common trends among SUTA rates. The rating is typically experience-based, which means that your SUTA rate (and therefore your tax bill) will be higher or lower based on how many unemployment claims have been filed against your company.
Each state also has different periods of time for which your rating may be affected by a claim. For example, some states will track employee terminations from up to five years ago, while others will only track it in the last year.
There are situations where you can request a SUTA experience rating change for your company.
All states also have maximum and minimum SUTA rates that can be charged to a company. The minimum rate is typically assigned to companies that have a long track record of paying wages with no unemployment claims from prior employees.
The maximum rate, on the other hand, is charged to companies that have a high number of unemployment claims from former employees.
Certain companies have such high turnover rates that their high SUTA rate does not come close to covering the costs of all their UI claims. In this situation, the state may be forced to slightly raise SUTA rates on companies across the rest of the state.
What Does SUTA Subject Wages Mean?
The second factor that goes into your SUTA tax liability is the amount of wages paid and the number of employees you employ. Your company is charged for each employee each year up to a maximum wage value. After the employee’s yearly earnings have reached the cutoff value, earnings for the employee are no longer included in determining SATA subject wages.
StaffMarket.com has an excellent guide here that explains the SUTA wage base for each state.
Ultimately, this is what your SUTA tax burden would look like with the following employee information:
Photo courtesy of StaffMarket.com
In the example above, let’s say the SUTA new business experience rate is 2.7% (which is the new business rate for most states). That means your total amount of SUTA taxes would be $66,250 x 2.7% = $1,789 for the year.
3 Easy Ways to Reduce SUTA
- Avoid terminations and layoffs if possible
- Contest questionable unemployment benefit claims
- Follow sound HR practices (make sure any employee terminations have well-documented evidence to prevent bad employees from getting their claims approved from state workforce boards)
By following these rules and practices, you can ensure SUTA, FUTA, and Form 940 are a no-brainer for your company every year.