Important Notice About the FUTA Tax Rate

Updated November 16, 2023

What Employers Need to Know

If you use a payroll service like ours, you likely don’t spend much time thinking about the Federal Unemployment Tax Act. It provides for payments of unemployment compensation to workers who have lost their jobs. Most employers pay both a state and a federal unemployment tax.

If you’re handling payroll taxes yourself, be aware that the FUTA rate is 0.6% on the first $7,000 in wages (per employee).

One thing that can affect that amount is if states take loans from the Feds to pay for their unemployment claims but don’t repay them.

In the case of California, employers will pay up to $42.00 extra in tax per employee because the State defaulted on their loan to the IRS.

You can read more about this here. As always, if you have questions, please contact us.

The More You Know – Federal Unemployment Tax Act

The Federal government identified California as facing a Federal Unemployment Tax (FUTA) credit reduction due to an unpaid federal loan the State had taken.

This happened last in 2017. If an employer was subject to FUTA (in 2017) and had any employees with taxable wages (in California), they were required to pay an additional amount in FUTA retroactively to January 1st, 2017.

In this example, if an employee received taxable wages, the credit reduction rate would have been 2.1% on FUTA applicable wages paid to employees.

The outstanding loan balances resulted in employers paying additional federal unemployment tax of up to $147 per employee beyond the standard FUTA cost of up to $42 per employee.

If You Have a Payroll Service

Pacific Payroll handles all payroll tax paperwork, filings, and payments for FUTA, keeping you in compliance. You don’t have to keep track of loans your state takes, nor any changing amounts – we handle that for you:

• State-level system update of credit reduction rates
• Automatic calculation of the FUTA credit reduction with your last scheduled payroll of the year
• Personal review of all FUTA accounts in January to ensure all accounts are paid
• Preparation and filing of Form 940

Should you have any further questions or just like to talk about payroll issues, please reach out to our office.

How to Calculate FUTA

As mentioned above, the current FUTA rate (if employers are subject to State Unemployment) is 0.6% but only on the first $7,000 in wages paid to an employee (sometimes called the FUTA wage base). In other words, the employer pays a max of $42.00 per year for FUTA per employee.

This tax may be offset by credits of up to 5.4% (known as the “normal credit” and “additional credit”) against their FUTA tax liability for amounts paid to a state unemployment fund. The net FUTA tax rate for most employers is 0.6% (i.e., 6.0% − 5.4%). If you do not pay State unemployment tax not only would you face possible penalties with your State but your Federal Unemployment Tax (FUTA) may be increased by the IRS.

Under Title XII of the Social Security Act, States with financial difficulties can borrow funds from the federal government to pay unemployment benefits. If a state defaults on its repayment of the loan, the amount of state unemployment tax credits that employers in the state may claim is reduced.

Payroll Guidance on FUTA

The tax is reported on the IRS 940 Form on a yearly basis (at year’s end), but the tax is handled with each payroll and paid throughout the year – not at year-end, or penalties and interest may get triggered. This helps keep our clients well within the payment guidelines set by the IRS. Copies of all forms filed on behalf of a business are provided to our clients in a timely manner.

If you’re handling payroll on your own and have additional questions not addressed above, please feel free to contact us.

Pacific Payroll Group, LLC is not responsible for taxes that we cannot collect from any client and/or are not authorized to collect.