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What is FUTA and how does it affect my business?

FUTA stands for the Federal Unemployment Tax Act. It’s a payroll tax that employers pay to fund the federal unemployment system. Unlike Social Security and Medicare taxes, FUTA is paid entirely by the employer. You don’t withhold anything from employee paychecks for this tax.

The official FUTA rate is 6% on the first $7,000 of wages you pay each employee during the year. That sounds significant, but here’s where it gets better. If you pay your state unemployment taxes on time, you receive a credit of up to 5.4% against your FUTA liability. That brings the effective federal rate down to 0.6% for most employers.

At 0.6%, FUTA costs about $42 per employee per year. Once you’ve paid someone $7,000 in a calendar year, you’re done with FUTA for that employee until January. The per-employee cap makes this a predictable expense to budget for.

You become subject to FUTA when you pay $1,500 or more in wages in any calendar quarter, or when you have at least one employee for any part of a day in 20 or more different weeks during the year. Most employers with regular employees will meet one of these thresholds quickly.

The state unemployment connection matters for your credit. Massachusetts requires employers to pay state unemployment insurance, and paying that on time is what qualifies you for the full 5.4% FUTA credit. If you’re late on state payments or your state has an outstanding federal unemployment loan, your credit can be reduced and your effective FUTA rate goes up.

Filing happens annually on Form 940, due by January 31 for the prior year. However, if your FUTA liability exceeds $500 in any quarter, you need to deposit that amount by the end of the following month. Managed payroll services handle these deposits and filings automatically so you don’t miss deadlines and trigger penalties.

For Merrimack Valley and Greater Boston businesses with employees, FUTA is simply part of your total payroll tax burden. It’s not large compared to other payroll taxes, but it does require proper tracking and timely filing. Missing the state unemployment payment deadline or forgetting Form 940 can result in penalties that cost more than the tax itself.

The practical effect on your business is a modest but ongoing expense that scales with headcount. Budget roughly $42 per employee per year for FUTA, make sure your state unemployment taxes stay current, and include Form 940 in your year-end compliance calendar.

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