This article explains how the Federal Unemployment Tax Act (FUTA) tax is calculated and how it automatically stops when the limit is reached. It also provides the steps to verify that your FUTA payroll item and your employee are set up correctly.
Note: For information on the FUTA credit reduction of 2017 see 2017 Federal Unemployment Tax Act (FUTA) Credit Reductions.
Employers must pay unemployment taxes for their employees based on FUTA. You owe federal unemployment taxes if you paid at least $1500 in wages during any calendar quarter in the current or previous year. Employees do not pay FUTA taxes.
The FUTA rate is 6.0% and employers can take a credit of up to 5.4% of taxable income if they pay state unemployment taxes. This amount is deducted from the amount of employee federal unemployment taxes you owe. Most states have their own State Unemployment Insurance Tax Act (SUTA or SUI). If you qualify for the highest credit, then the minimum FUTA rate is .6%. Each state has its own new employer rate for new businesses. The length of time that new employers are subject to this rate also varies. Contact your state unemployment office for information on new employer rates.
The wage base for FUTA is $7,000. Once employee year-to-date (YTD) wages exceed $7,000, an employer stops paying FUTA for that employee. These amounts and rates are set in the payroll items, and QuickBooks Desktop automatically stops deducting FUTA once the limit is reached. The maximum amount paid is $420 per employee, and the minimum amount is $42.
Since the IRS assumes you will pay state unemployment taxes at the rate of 5.4%, it requires you to submit 0.6% of your payroll within one month of the end of each calendar quarter (for example, April 30 for the January to March quarter)
If you are certain the FUTA deduction is not calculating correctly, follow these steps to ensure that your payroll is set up correctly.
To verify the FUTA rate:
- In QuickBooks Desktop, choose Lists > Payroll Item List.
- Double-click Federal Unemployment.
- Click Next until you see the Federal Unemployment Tax Rate window.
- Select the rate that applies to your company, and click Next > Next > Finish.
To verify that the FUTA checkbox is selected in the employee setup:
- In QuickBooks Desktop, choose Employees > Employee Center. Click the Employees tab and double-click the employee's name.
- Click the Payroll Info tab.
- Click the Taxes button.
- On the Federal tab, verify that the Federal Unemployment Tax checkbox is selected if the employee is subject to federal unemployment taxes.
- Click OK.
To verify whether the employee has reached the YTD limit:
- Choose Report > Employees & Payroll > Payroll Summary.
- Click the Dates drop-down arrow, select This Calendar Year.
- Verify whether the employee has reached the YTD limit.
Note: The YTD limit $420 if you are subject to the 6.0% FUTA rate, or $42 if you are receiving the full credit and the FUTA rate is .6%. See Taxes and rates: wage bases and limits for more information.