When a person conducts services for you and you are deemed an “employer,” you may be subject to the federal unemployment tax under the Federal Unemployment Tax Act (FUTA), one of the three employment taxes that an employer would need to pay.
The other two are the Federal Income Tax Withheld and Social Security Tax. Employers who fail to pay this tax may be subject to interests and penalties.
The acronym FUTA refers to the Federal Unemployment Tax Act, which delivers compensation for unemployed workers. If your company has workers, you’ll be liable for FUTA taxes, SUTA taxes, or state unemployment taxes.
The FUTA tax works because you, as an employer, pay federal and state unemployment taxes, which then fund unemployment insurance payments for employees who are laid off or lose their jobs through no fault of their own.
Accordingly, unlike the other payroll taxes—social security and Medicare, divided evenly between employers and employees—workers do not pay the FUTA payroll tax.
Whereas social security and Medicare taxes are withheld from workers’ paychecks, this is not the case with federal or state unemployment taxes. Rather, both the federal government and state governments collect unemployment taxes from employers, and the federal government sends its portion to the states to supplement what the states collect.
With this synopsis in mind, let’s plunge into the particulars. Both FUTA and SUTA taxes are employer taxes, also often called payroll taxes. Accordingly, if your company does not have any workers, you will not be responsible for federal or state unemployment taxes.
On the other hand, any business that falls into either of these criteria must pay FUTA taxes:
You do not have to pay FUTA or SUTA taxes on your income unless your business is structured as a corporation. If you have a family-run corporation or partnership, your child’s wages (if 21 or older) and spouse’s wages do not count for FUTA and SUTA purposes. If your business has household or agricultural workers, the qualifications for whether you’re bound to pay FUTA tax for these workers are slightly distinguishable. The IRS Employer’s Tax Guide can help you determine your FUTA tax obligations for these types of workers.
Your SUTA conditions differ by state, so you’ll want to consult your state’s unemployment tax agency to decide if you must pay SUTA taxes. Certain businesses, such as nonprofits, religious institutions, and educational institutions, are excused from paying FUTA and SUTA taxes.
Suppose your business has locations in different states or workers who work in one state and live in another (or even remote workers). In that circumstance, you can use the U.S. Department of Labor’s five-part test for multi-state employees to decide which state you must remit your tax to.
You must evaluate each of the following:
The test usually suggests that you have to pay unemployment taxes in the state where the worker works and performs services. Some states have reciprocal arrangements with nearby states, allowing employers to choose the state of coverage.
Typically, a person is considered an “employer” for FUTA if they meet either of the following two tests:
An example of meeting the first test is as follows:
Nevertheless, certain restrictions apply for “employers” of agricultural employees and domestic employees.
Almost all kinds of taxpayers, such as an individual, a partnership, a corporation, an s-corporation, a limited liability company, a trust, and an estate, need to pay federal unemployment tax if it applies. The only exception is that tax-exempt organizations are not subject to FUTA.
An employer of agricultural workers is subject to FUTA when they:
An employer of domestic workers is only subject to FUTA if they pay cash wages of $1,000 or more during any calendar quarter in the current or preceding year.
Note that wages must be in cash, or it will not count.
This may seem evident, but it can be easy for a deadline to sneak up on you with the other tax and general business responsibilities. Whether you pay FUTA or SUTA taxes annually or quarterly, it’s essential to pay on time. If you fail to pay on time, the IRS and your state unemployment agency will charge fees. The IRS penalties for late payment of employment taxes vary from 2% to 25%, depending on how late you are. These are entirely avoidable fees as long as you stick to deadlines.
By adhering to deadlines and not waiting until the last minute, you’ll be less likely to make errors in your deposits or filing of Form 940, which will save you time, effort, and money to amend any mistakes.
Tax laws are complex and ever-changing. Although various tax preparation software on the market may help you with your tax problems, they cannot provide the same level of service that an experienced and knowledgeable tax attorney can.
If you are unsure about your payroll taxes or need someone to represent you before the IRS, a tax attorney can help you.
Do not attempt to manage the FUTA on your own. You could cost yourself and your business money. By hiring an experienced and local business attorney, you save yourself the headache of dealing with unemployment taxes on your own. Schedule a consultation with a business attorney or a tax attorney today.
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