The thought of “Why should I pay Federal Unemployment Tax?” might have crossed your mind at least a few times. As this tax can eat up a considerable portion of your funds, it is common for most people to believe that Federal Unemployment taxes are nothing but a burden.
But is it truly the thing to be concerned about? I think not really. This tax will be beneficial for so many unemployed workers in several ways.
Are you excited to know about the Federal Unemployment Tax Act? Let’s have a look at the core of the act and know how this act will provide benefits to unemployed individuals.
Define the Federal Unemployment Tax Act
The Federal Unemployment Tax Act is a federal law that was instituted on employers to fund the government. This federal unemployment tax is used by the government to monitor unemployment insurance programs. The Federal Unemployment Tax Act (FUTA) runs as a federal-state partnership to fund unemployment benefits during high unemployment periods. FUTA tax is only paid by employers and not by individuals. The employers who participate in this unemployment insurance program will receive tax credits under this act.
What is the Purpose of the Federal Unemployment Tax Act?
The cost of running an entire nation is complex in a large, populated country. As the population is too large, the unemployment rate is also high according to the population. So this federal unemployment tax is taken from employers to fund the unemployment workers’ benefits for those who lose their jobs. These unemployment programs are managed by state workforce agencies. Federal loans are also provided with the help of these funds, which may be a big relief for the unemployed employees.
How are Federal Unemployment Tax Act Deduction Limits Calculated?
It is important to know what kinds of income are taxed. Generally, the federal unemployment taxes are calculated by multiplying the applicable tax rate by the taxable income. The taxable income includes the salaries, bonuses, sick leave pay, vacation pay, and pay for retirement plans. Although it seems simple, it consists of several steps for an accurate calculation.
The Federal Unemployment Tax rate is 6% on the first $7000 of wages paid to an employee per year. So, as per the tax rate, the maximum federal tax that should be paid is $7000*6% = $420 per employee. Most of the employers will receive a credit of 5.4% for paying state unemployment tax, which reduces the effective FUTA rate to 0.6%. This means that the actual FUTA tax paid $70000*0.6% = $42 per employee. The amount of tax credits will lower the amount that they have borrowed from the federal government. Companies can use some software to calculate the tax and reduce errors.
Which Tools are Used for FUTA Calculations?
Calculating the Federal Unemployment Tax liability is an important thing to consider. But it takes so much effort to calculate it manually. So, companies use some efficient software to calculate these tax liabilities. QuickBooks is known as one of the significant payroll software programs that offers several tools for FUTA calculations. QuickBooks will automatically track all the employee wages and apply the tax rate and the unemployment tax credits.
How do Companies File FUTA Taxes?
The employer is required to file FUTA taxes annually, following the IRS Form 940. According to IRS Form 940, if the business pays $1500 in wages per year, then they are mandatory to file FUTA Taxes. This process involves calculating the total liability for the annual year, taking the unemployment tax credits. After that, the employer should submit the completed form to the IRS. This should be submitted before the IRS deadline, which is January 31.
Conclusion
In conclusion, we want to say that it is important to understand the factors of the Federal Unemployment Tax Act for all employers. It becomes easy once you know how to pay, how much to pay, which reduces your unnecessary stress. Furthermore, if you are interested in knowing more about FUTA or facing issues during calculations, then connect to our ProAdvisor.