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Two Methods to Compute FUTA Tax Liability

August 3, 1999
Issue: You are starting your own business, anticipating hiring a number of employees, and aware that the Federal Unemployment Tax Act (FUTA) imposes a tax on employers. The tax is based on each employee's taxable wages until such wages reach the taxable wage base, at which time there is no further FUTA liability. How can you compute the FUTA tax liability for your employees?

Answer: FUTA tax applies to the first $7,000 paid to each employee annually. This is the taxable wage base. There is no FUTA tax liability after an employee earns $7,000. The current gross FUTA tax rate is 6.2 percent. Effective January 1, 2008, the rate will be 6.0 percent. The maximum allowable credit is 5.4 percent. Thus, the current net FUTA tax rate is 0.8 percent (6.2% - 5.4%). The net FUTA tax rate will be 0.6 percent, effective January 1, 2008.

How to compute FUTA tax liability
Although the FUTA tax is reported annually, the FUTA tax liability is calculated quarterly for the first three quarters of each year for deposit purposes. This calculation allows employers to assume that they will be taking the maximum allowable credit. Thus, it is not necessary to calculate the actual credit amount each quarter. For quarterly deposit purposes, net FUTA tax liability is computed in one of two ways:

Method 1

  1. Subtract the maximum allowable credit rate from the FUTA tax rate (6.2% - 5.4% = .8%).
  2. Multiply each employee's wages up to the wage base ($7,000) paid in the quarter by .8%
  3. Add up the totals, and the resulting figure is the net quarterly FUTA tax liability.

Method 2

  1. Multiply the current FUTA tax rate (6.2%) by each employee's taxable wages up to the wage base ($7,000) paid in the quarter.
  2. Add up the results. The total is the gross FUTA tax liability.
  3. Next, multiply the maximum allowable credit amount (5.4%) by the same wages up to the wage base.
  4. Add up the results. This is the maximum allowable credit.
  5. Subtract this amount from the gross FUTA tax liability. The result is the net quarterly FUTA tax liability.

Source: CCH Incorporated is a leading provider of information and software for human resources, legal, accounting, health care and small business professionals. CCH offers human resource management, payroll, employment, benefits, and worker safety products and publications in print, CD, online and via the Internet. For more information and other updates on the latest HR news, check our Web site at http://hr.cch.com.

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion.