When you run a business, you have to pay taxes on the wages you pay your employees. But, trying to calculate and track the various payroll taxes you owe can be confusing. You might even wonder, “What’s the point of all this?”
Payroll taxes support state and federal government programs such as Medicare, Social Security, and state unemployment benefits. Medicare and Social Security payments get grouped under FICA taxes, and unemployment benefits are funded by taxes like FUTA.
Read on to learn what FUTA taxes are, who they apply to, and how to pay them.
What Is the FUTA Tax?
FUTA stands for the Federal Unemployment Tax Act. This federal law created a fund to provide unemployment benefits to people who are laid off or fired. The federal government, however, doesn’t administer unemployment—states do. That’s why FUTA funds go toward each state’s unemployment program.
What Is the FUTA Tax Rate?
The FUTA tax rate is 6%, and it only applies to the first $7,000 of an employee's wages for the entire year. You don’t pay FUTA taxes on any salary after that first $7,000.
In other words, the maximum amount of FUTA taxes you pay is $420 (6% of $7,000) per qualifying employee annually.
Who Has To Pay FUTA Taxes?
Only employers have to pay FUTA taxes, unlike FICA taxes (for Social Security and Medicare). In other words, you don’t withhold any FUTA taxes from your employees.
What's more, only certain employers need to pay these employment taxes. So do you have to pay FUTA taxes? Most likely, yes. The Internal Revenue Service (IRS) uses three methods to decide if you need to pay FUTA taxes. It uses a general method for general employees and special methods for employers who hire household or agricultural employees.
Most small business owners fall in the general category, which says you need to pay FUTA taxes for an employee if:
- You paid that employee $1,500 or more (in wages) during any calendar quarter in the previous or current year, or
- The employee worked at least 20 or more different weeks in the current or last year—this includes full-time, part-time and temp workers.
That first rule applies to individual wages, not your company’s total taxable wages. So if you have three temp workers who each earn $1,000 per quarter, and your quarterly payroll is $3,000—you don’t have to pay FUTA taxes since none of your employees make more than $1,500.
What’s more, the general method only applies to employees that get a regular salary or W-2 wages. You don’t have to pay FUTA taxes if you hire an independent contractor.
Household and agricultural employers can use the additional tests in IRS Publication 15, Employers Tax Guide, to see if they have to pay FUTA taxes.
Self-employed individuals, such as independent contractors and freelancers, do not have to pay FUTA taxes on their income.
How Do I Calculate My FUTA Tax?
Need to figure out your team's FUTA taxes so you can make the right payments to the IRS? Here's a simple formula to follow:
FUTA Tax = FUTA Tax Rate x Taxable Wage Limit
For 2023, that means:
FUTA Tax = 6% x $7,000
Let's say you have a team member who earned $15,000 this quarter alone. Since this tax only applies to the first $7,000 of wages in a year, you'd calculate their FUTA tax as follows:
FUTA Tax for an Employee = FUTA Tax Rate x Taxable Wage Limit
FUTA Tax = 6% x $7,000
= $420
That means you'd owe the IRS $420 for that one employee every year. You can do this process for each team member to figure out the total amount you owe Uncle Sam every quarter or year (more on when these taxes are due later!).
FUTA Tax for Employee Making More than $1,500 but less than $7,000
What if someone you hired made less than $7,000? As long as they made more than the lower limit, which is $1,500 or they worked 20 weeks or more for you, you'll still owe FUTA taxes for them.
For example, let's say you have a team member who made $2,000 last year (perhaps you hired someone, and had to quickly let them go). You'd still do the same formula, but it would look like this:
FUTA Tax = FUTA Tax Rate x Wages
= 6% x $2,000
= $120
So you'd need to eventually send Uncle Sam $120 in taxes for that employee.
Sound complicated? Let Hourly take payroll taxes off your hands. Their full-service payroll platform can automatically calculate payroll taxes and file them on your behalf.
FUTA Tax Credit
If you pay state unemployment taxes (SUTA), you may be eligible for a tax credit of up to 5.4%, making your FUTA tax rate 0.6%. State unemployment programs are sometimes called state unemployment insurance (SUI), and your payments may be referred to as contributions.
The formula to figure that out is:
FUTA Tax = (FUTA Tax Rate - 5.4% Tax Credit) x $7,000
= (6% - 5.4%) x $7,000
= .06% x $7,000
= $42
Generally, you can apply the full credit if you paid all your SUTA taxes in full and on time, and your state is not a credit reduction state.
Well, you’re probably wondering if you’re in one of those states, eh? As of 2022, there are no credit reduction states. However, the following states are at risk of credit reductions if outstanding loan amounts are not repaid:
- California
- Colorado
- Connecticut
- Illinois
- Massachusetts
- Minnesota
- New Jersey
- New York
- Pennsylvania
States can take out a Federal Unemployment Trust Fund loan if they can’t pay unemployment benefits. After two years, a state that has not paid back the loan becomes a credit reduction state until the loan is repaid.
You can check with the Department of Labor website to see if you’re in a credit reduction state and keep an eye out for states at risk for credit reduction in the current tax year.
So, let’s say you find out you’re in a state with credit reduction status. What kind of FUTA tax will you be paying?
You’ll essentially have to add your state’s credit reduction rate back into your calculations. For example, let’s say you live in a state with a credit reduction rate of 0.6%, and you paid your SUI taxes in full and on time.
Since you made payments in full and on time, you can take the maximum credit and subtract 5.4% from 6.0% to get a 0.6% FUTA tax rate. Then, you add back your state’s credit reduction rate of 0.6% to get a final tax rate of 1.2%.
When are FUTA Taxes Due?
So, if figuring out your FUTA rate isn’t always straightforward, at least there’s one deadline for everyone, right? Unfortunately, that’s not the case. If you have to pay FUTA taxes, your deadline depends on how much you owe.
Here’s how it breaks down:
- Employers who owe $500 or more each quarter must make quarterly tax payments.
- Employers who owe less than $500 per quarter carry over their FUTA tax liability to the next quarter until they owe more than $500. Once you owe more than $500, you pay the full amount of taxes you owe so far, including the amounts you rolled over from the previous quarters.
- Employers who owe $500 or less for the whole year can pay their total annual FUTA taxes by the Q4 deadline of Jan. 31.
Quarterly payments are due on the last day of the month following the end of each quarter. For instance, Q1 ends on March 31, so the FUTA taxes for Q1 are due on or before April 30.
The full quarterly deadlines are:
- Q1 taxes are due Apr 30
- Q2 taxes are due Jul 31
- Q3 taxes are due Oct 31
- Q4 taxes are due Jan 31 (of the following calendar year)
How To Make FUTA Tax Payments
FUTA payments must be made electronically. You can deposit them using the Electronic Federal Tax Payment System (EFTPS), a free service offered by the IRS.
When using EFTPS, you must schedule payments by 8 p.m. the night before the due date to give the system enough time to transfer the funds from your bank account.
Filing Form 940
Now that you’ve paid your FUTA taxes, you’re done, right? Not yet, you also have to report how much you paid. Every year that you pay FUTA taxes, you have to file IRS Form 940, also known as the Employer’s Annual Federal Unemployment Tax Return.
For most employers, Form 940 is due by Jan. 31. However, if you sent in all your tax payments on time throughout the year, you have until Feb. 10 to file Form 940. If your due date falls on a weekend or a holiday, the due date becomes the next business day.
Form 940 can be e-filed or mailed to the IRS. To find the correct mailing address for your state, refer to the IRS Instructions for Form 940. Late filing can result in a 2-15% fee on your total FUTA tax amount, depending on how late you submit the form.
If you pay FUTA taxes in a credit reduction state, you’ll need to file Schedule A (Form 940) to calculate your rate.
Wrapping it Up: What to Know About FUTA Taxes
The FUTA tax was created to support funds for state unemployment benefits. Unlike FICA taxes, employers are responsible for paying the entire FUTA tax amount—it’s not split with employees.
If you’re a small business with a few or more employees, you’ll most likely pay quarterly FUTA taxes. It’s easiest to pay electronically, and don’t forget you need to report that total amount to the IRS every year too—with Form 940.
So now that you know all there is to know about FUTA taxes—all that’s left to do? Start setting those funds aside!
1. Introducing Yourself
Your introductory email needs to pack a lot of information into a small package. Try something like this:
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Hello Jane,
My name is John Doe and I work for ABC Agency, where we provide business insurance policies to many of Dallas' rockstar small businesses.
Congratulations on your new business, Jane's Bakery. Are you wondering if you have all the insurance you need? Or if your policies will really cover you in a pinch?
At ABC Agency, we pride ourselves on providing robust, comprehensive coverage options to companies like yours with flexible, pay-as-you-go plans.
Are you available this week to talk more about how we can help? I can help you find the most affordable rates and the best policies out there.
I look forward to speaking with you soon.
Cheers,
John Doe
2. Presenting a Quote
Once you've met with your potential client, a quick reply with their quote will get the ball rolling.
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Hi Jane,
Thanks so much for meeting with me this morning. I loved touring Jane's Bakery–I can still smell those delicious chocolate chip cookies baking! You have a great location, and I'm sure you're going to do great on Front St.
After reviewing my notes, I've pulled together an insurance quote for you (attached). I recommend a business owner's policy. A BOP includes several insurance products in one: liability, property insurance, and business interruption insurance. It offers robust coverage at a competitive price.
I'll call you in a few days to see what you think about this insurance plan. In the meantime, if you have any questions, don't hesitate to email me or call me at [phone number].
Again, thank you for your time today. I look forward to working with you in the future.
Cheers,
John Doe
3. Thanks for Purchasing a Policy
Gratitude is important! It's never a bad idea to thank your clients for their business.
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Hi Jane,
Thank you for choosing a business owner's policy with ABC Agency. We know it's so important to get the right coverage for your business, and we are honoured you've placed your trust in us.
We're excited to work closely with you, and our no. 1 goal is to make sure you're business is always protected.
Do you have any questions? We are here to help. Reach out whenever something comes to mind.
Thank you again for choosing ABC Agency to insure Jane's Bakery.
Cheers,
John Doe
4. Welcome Email
A welcome email helps clients feel like you're there to help–and can softly pitch other insurance products you offer.
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Dear Jane,
Welcome to the ABC family! We are thrilled to have you as a new customer and can't wait to meet all of your insurance needs.
As an independent insurance agency, we work with multiple insurance providers to find the best coverage options for all our customers. If you need any other type of insurance–like [include additional offerings unique to your agency, like life insurance, health insurance, home insurance or anything else]–we can help you too.
Do you want to discuss any of these policies?
Cheers,
John Doe
5. Introducing a New Product
A happy client may want to expand their business with you.
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Hello Jane,
I hope all is well with you and Jane's Bakery. I stopped in yesterday for a blueberry muffin and coffee, and they were delicious. I loved the hint of cinnamon in the muffin! Was that your idea?
I wanted you to be the first to know we are now offering commercial vehicle insurance to our policyholders. Auto insurance for your catering vans is super important since your personal car insurance won't cover them.
We're offering this insurance coverage solely to our current business clients at the moment and have some very competitive rates.
Would you like me to work up a quote for you?
As always, thanks so much for being a part of the ABC family.
Cheers,
John Doe
6. Asking For Referrals
Once your relationship is established and comfortable, let your clients help you grow.
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Hi Jane,
You've been a valuable member of the ABC family for two years now, and we so appreciate your business–not to mention the muffins you supply for our monthly meetings!
Because you are a valued policyholder, I wanted to ask a quick favour. I know you are active in the local Chamber of Commerce, and I'm hoping you might know some colleagues who would benefit from working with our insurance company.
Referrals are one of the most effective ways to connect with our community since people really trust their friends, family and colleagues. Is there anyone you'd recommend I speak with?
Remember that in addition to business insurance products, we offer everything from life insurance policies to pet insurance.
As a thank you for your help, we will send you an Amazon gift card of $100 when your referrals buy insurance from us.
Thanks so much for your help!
Cheers,
John Doe
7. Policy Renewal
If your client needs to renew their policy with you, send an email like this:
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Hi Jane,
I hope you're doing well! What a year it's been—from being listed as one of the top 5 bakeries in Dallas to being an official vendor for the city—you have so much to be proud of.
Just a heads up that your business owner's policy is up for renewal soon and will expire on June 15, 2023.
If you're still happy with the coverage, we can easily renew it for you.
Do you have some time to chat this week?
Looking forward to serving you again!
Cheers,
John Doe