Federal Unemployment Taxes

Almost all employers must pay federal unemployment taxes as mandated by the Federal Unemployment Tax Act (FUTA). You are liable to pay this tax, which finances both federal and state unemployment programs, if you:

• Employed one or more individuals who worked at least 20 (not necessarily consecutive) calendar weeks during the current or preceding tax year or
• Paid at least $1,500 in employee wages during any quarter.

If you meet either of these two conditions, you must pay FUTA taxes for the current and upcoming calendar years. For example, if your employee wage pool exceeds $1,500 in November of a given year, you are required to pay federal unemployment taxes for that entire year — not just for November and December — as well as for the next year.

The federal unemployment tax rate is 6.2 percent. Employers must pay this tax on the first $7,000 earned by each employee during a calendar year. Once an employee’s wages exceed this amount, you no longer have to pay federal unemployment taxes for that employee for the rest of the year.

If you pay your federal unemployment taxes early and send in your state unemployment taxes on time, you can claim a 5.4 percent credit on your federal unemployment return. So your federal unemployment tax rate will fall to 0.8 percent.

For an overview of the other legalities for which your business is responsible, see our Employee Filings for Corporations. Since most of these filings are connected to company financial management and taxation, record-keeping is an integral part of the process. Make sure you have a handle on all the necessary record keeping for small businesses!