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The Federal Unemployment Tax Act (FUTA) is a payroll tax that works in combination with state governments to provide unemployment benefits to out-of-work employees. According to the instructions for Form 940 from the Internal Revenue Service, FUTA is a federal law that requires that employers pay federal and state unemployment taxes based on employee wages. at a rate of 6% of the first $7,000 of the wages paid to an employee each year. The payroll tax paid by employers helps fund the federal government’s unemployment account.
A FUTA credit reduction allows employers in states that take out federal government loans to fund state unemployment to receive a credit of up to 5.4% when they file IRS Form 940. If this credit reduction results in increased FUTA tax liability, the liability considered to be incurred in the fourth calendar quarter and must be paid by January 31 of the following year. Employers who are exempt under IRS code 501(c), including many state employers, federal employers, and nonprofits, are also exempt from FUTA.
Ascentis' powerful HR software can help you with all of your employee tax compliance needs.