14 Jun, 2021

The Guide To Futa Tax Rate 2020

The Guide To FUTA Tax Rate 2020
Written by: - Phil Baker

Does the tax with a strange name, FUTA tax rate 2020, sound familiar? The truth of the matter is that this funky acronym is something that all employers need to be aware of as they have to pay for it.

Small business owners have lots of responsibilities to shoulder. The company you work for will determine if you will be in charge of hiring and training the ideal employees or if your duty will set the right vision for your brand.

The duties you will have to perform include payroll, monitoring of your business's credit report, and managing the credit scores of your business, taxes for employment and payroll, and so on.

Your company's long-term success depends on parts like your ability to manage your taxes or hire someone who will help you manage your taxes. Paying taxes like federal income tax, social security tax, and Medicare tax is something that you have to fulfill monthly, quarterly, and yearly as it is part of your obligation.

The FUTA tax is an employment tax you ought to be aware of. In this article, you will get to know a lot of things concerning FUTA. Like what is a FUTA tax, why the tax is needed, how to deposit and report the tax, how to pay the FUTA tax, how to calculate futa tax, the FUTA tax rate 2020, as well as bits on the FUTA tax calculator and the FUTA tax form 2020.

What Is FUTA Tax? 

FUTA means the Federal Unemployment Tax Act. It is a Federal law that requires all employers to pay unemployment taxes. They used these taxes in funding the Federal government's oversight regarding the unemployment program in all 50 states. Usually, the FUTA tax is only paid by employers, and there are only two ways with which you can manage this tax which are:

  1. Get the tax deposited each quarter.

  2. Always try to file an annual form.

State Unemployment Tax Programs

Each of the 50 states has its unemployment tax for funding unemployment benefits. There are several names for state unemployment taxes as the name depends on the state. SUTA tax, state unemployment insurance, and reemployment tax are the terms you can use when referring to state unemployment taxes.

When a state lacks enough money to complete the payment for unemployment benefits, the state will decide to get some money borrowed from the federal government. The FUTA taxes are the source of funds for the federal government.

FUTA Tax Rate 2020

According to the IRS, the FUTA tax rate 2020 is projected towards 6% and only applies to the first $7,000 you pay each of your employees as a wage throughout the year. They usually referred to the taxable wage base as the $7,000.

After the employers have finished making the tax payment for the first $7,000 in annual wages, there will be no need for them to make any payment concerning unemployment taxes. For this reason, when you are learning how to calculate FUTA tax for an employee that receives an annual wage of $6,000, you could get 6,000 multiplied by 0.06, and you will get $360.

Employees who earn way more than the $7,000 in annual wages, the employer needs to do the same calculation, and he/she will arrive at $420, which is the maximum amount that they have to pay in FUTA taxes for each one of their employees.

You don't always have to include all the payments you made to your employees in the annual wage you are using to calculate the responsibility of the FUTA tax. Normally, gross wages, most fringe benefits, and some employer contributions to an employee's retirement plans are added when calculating, and the total value you will arrive at will be under the thumbs of the 6% FUTA tax rate.

FUTA Tax Credit

Employers who take it in their power to always pay for the unemployment insurance early are usually eligible to get a FUTA tax credit of up to 5.4%, and that can lead to an effective FUTA tax rate of 0.6%. The percentage got back by the employers then depends on the particular state they are doing their business in and whether the state has any outstanding federal unemployment insurance loans.

Not all employers end up getting qualified to get the maximum tax credit. If you have any employee working in a credit reduction state, you will be obliged to get the FUTA tax credit reduced.

Credit Reduction States

Suppose a state is yet to repay the money it borrowed from the federal government to cover its unemployment benefits liability. In that case, one can classify it as a credit reduction state. The term means that the amount of the credit the state owes for the state unemployment tax will get reduced, and the rate of the FUTA tax will increase subsequently.

The credit reduction states are usually determined by the Department of Labor yearly. At the end of 2019, it was reported that the only state that had past-due loan balances was the Virgin Islands because of the Federal Unemployment Trust Fund. For this reason, the FUTA tax rate 2020 will increase.

For example, when a state has a credit reduction of about 0.3%, the employers living in that state cannot receive a maximum FUTA credit of 5.4%. Rather, they will get a maximum FUTA credit of 5.1% (5.4% - 0.3%). It means you will have to make a payment for a FUTA tax rate of 0.9% (6% - 5.1%).

When Are FUTA Taxes Due? 

You always have to keep in mind and understand that in most states, the FUTA tax shouldn't be collected or withheld from your employees like income tax withholding. Rather, the FUTA tax is something that your business has the responsibility of paying as you are the employer.

The FUTA taxes of your employees need to be paid four times per year. With the chart below, you can tell when your FUTA taxes are due for payment.

  • Quarter 1 (January 1–March 31): Payment is due by April 30

  • Quarter 2 (April 1–June 30): Payment is due by July 31

  • Quarter 3 (July 1–September 30): Payment is due by October 31

  • Quarter 4 (October 1–December 31): Payment is due by January 31

The calendar quarter dates are a representation of the pay period during which your employees got their wages. The due date represents when you have to deposit the FUTA taxes and any income tax that you withheld for your employees with the federal government.

FUTA Tax Deposits

The FUTA taxes have to be deposited every quarter. The FUTA taxes ought to be deposited by the last day of the month after every quarter. For instance, since the first quarter ends on March 31, the due date for your taxes should be April 31.

You are to make your deposit on the next business day. The due date for the tax payment falls on a weekend or legal holiday.

Quarter

Quarter End Date

FUTA Tax Due Date

1st Quarter (January, February, March)

March 31

April 30

2nd Quarter (April, May, June)

June 30

July 31

3rd Quarter (July, August, September)

September 30

October 31

4th Quarter (October, November, December)

December 31

January 31

If $500 or less during a quarter of the calendar is your business's payroll liability for the FUTA tax rate 2020, there will be no need for you to deposit your FUTA taxes at the end of the quarter. What you will have to do is to get the tax liability rolled over to the next quarter.

Whenever the FUTA tax liability for your business exceeds $500 during a quarter (with taxes rolled over from the previous quarter included), they must deposit the tax via electronic funds transfer (EFT).

If, during the fourth quarter, the tax liability is way over $500, you will have to make the payment for your FUTA tax by January 31. Although, if the FUTA tax liability is $500 or less, you use EFT to deposit the money, use a credit card to pay the taxes, or use Form 940 to pay taxes.

Reporting FUTA Taxes

The FUTA tax form 2020 that is used in reporting FUTA taxes is IRS Form 940. You will need to file the IRS Form 940 by January 31 of each year. Although, there is always a different date set for the due date for filing Form 940 and paying the taxes.

Anytime the employers decide to pay their taxes early, the government always gives an extension of the deadline for filing Form 940 to the second Monday in February. 

The fact is that all employers must pay the unemployment taxes for the federal and state. An employer will determine if you need him/her to pay the FUTA tax by attempting these three tests: the general test, household employee test, and farmworkers test.

Based on the general test, the employers must file a Form 940 and make the payment for the FUTA tax if their business gets any of the following criterion satisfied:

  • They paid $1,500 or more in wages to employees over the last two calendar years.

  • They had at least one employee for any 20+ weeks over the last two calendar years.

Note:

  • You don't have to calculate the 20 weeks consecutively.

  • You can include employees who could work any part of a day.

  • You can include employees who work for you temporarily, part-time, and full-time.

  • The FUTA does not imply self-employed individuals.

  • You can include partners if your business is a legal partnership responsible for filing IRS Form 1065

  • You can include or subject shareholders and corporate officers in S corporations, also referred to as businesses that file IRS Form 2553 to FUTA. 

One should always know how to tell FUTA and FICA tax apart. The FICA tax is a separate tax that required both the employers and employees to pay to provide them both Social Security and Medicare benefits.

The FICA tax rate is 6.2% on compensations that can be taxed for a fixed amount annually for the Social Security portion and 1.45% of the compensation that can be taxed for the Medical portion. The employer and the employee are both required to pay the same amount.

Effective Handling of FUTA Tax

Paying taxes is one obligation that all employers can't avoid or afford to ignore. Although, irrespective of how complicated this is, employers can pay off their taxes successfully and effectively.

Irrespective of when an employer pays the FUTA tax, annually or quarterly, paying these taxes early or when you are meant to will help you avoid unnecessary penalties that range from 2% to 25%, depending on how late the employer finally pays his/her taxes.

The steps for paying for your FUTA taxes are rather straightforward, especially when your employees live in the same area where the physical building of your business is located. Getting the tax paid can get complicated when a business has several locations, remote employees, or employees working in a particular state while living in another. 

Either way, getting payroll taxes outsourced can make this entire process of paying the FUTA taxes lit easier. With the right software for managing your taxes, employers will no longer need to calculate taxes manually.

They will have to use the FUTA tax calculator, pay and report FUTA, all the while ensuring that they can prevent having to pay fines because of inadequate handling of taxes. Because of this, it will be possible for businesses to meet their necessary deadlines, prevent calculation errors, and avoid penalties for non-compliance.

How To Calculate FUTA Tax

Let's assume that you are owing to the FUTA tax (6%), and like most businesses, you are already eligible to get the maximum credit reduction of 5.4%. After the credit, your FUTA tax liability will become 0.6% of the first $7,000 that each of your employees earns.

Here is a breakdown that will guide and teach you how to calculate FUTA tax or how to calculate your FUTA liability in a case like this:

  • Get the wages they paid you during reporting added up to your employees under the thumbs of FUTA tax.

  • $7,000 (John) + $2,000 (Paul) + $4,000 (George) = $13,000 Wages Earned Q1

  • Get your quarterly wages of your employees who were under the thumb of FUTA tax multiplied by 0.006. This value will help you assume that you are eligible for getting the maximum credit of 5.4%.

  • $13,000 X 0.006 = $78 FUTA Liability for Q1

If your FUTA tax is $500 or less, the IRS will give you the chance of carrying your FUTA payment over to the next quarter. So, there will be no need for you to make any FUTA deposit in the examples given above.

Conclusion

Since you are a small business owner, there will be some areas of your job that you adore doing and certain obligations that you don't like the idea of doing. Irrespective of what you choose, love, or hate, both employment taxes and payroll taxes are some things that you really can't afford to ignore. 

Learning the ropes on calculating FUTA tax so you can avoid always using a FUTA tax calculator is not complicated. Although, if you are feeling super overwhelmed or too busy to be in charge of managing the state and federal employment taxes alone, you can always choose to get a professional accountant or bookkeeper hired to assist you.

Even though this has a cost linked to its services already, you can decide to pay a much higher price if you think against properly handling your taxes.

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