The FUTA tax rate for 2019 was 6.0% on the first $7,000 of wages paid to each employee, but almost every employer paid an effective rate of just 0.6% after applying the 5.4% credit for state unemployment contributions. That worked out to a maximum of $42 per employee for the year. Employers in the U.S. Virgin Islands were the only exception, paying an effective 3.3% because of a credit reduction.
The 6% Gross Rate and $7,000 Wage Base
The 6.0% gross rate is set by federal statute and has not changed for years.1Office of the Law Revision Counsel. 26 USC 3301 – Rate of Tax It applies only to the first $7,000 in wages paid to each employee during the calendar year.2Office of the Law Revision Counsel. 26 USC 3306 – Definitions Once an employee’s year-to-date wages hit $7,000, no additional FUTA is calculated on later pay to that person. At the gross rate, the ceiling per employee for 2019 was $420 (6% of $7,000).
How the 5.4% Credit Cuts the Rate to 0.6%
The gross 6% is misleading on its own. Federal law lets you credit state unemployment insurance contributions against your FUTA liability, up to a combined maximum of 5.4%.3Office of the Law Revision Counsel. 26 USC 3302 – Credits Against Tax Subtract that from 6% and the effective rate drops to 0.6%, capping the tax at $42 per employee for 2019.
The full credit has one key condition: state unemployment taxes must be paid on or before the federal filing deadline for Form 940. Pay state taxes late and the credit on those late contributions is reduced to 90% of what it would have been.3Office of the Law Revision Counsel. 26 USC 3302 – Credits Against Tax That 10% haircut goes straight onto the federal bill.
The U.S. Virgin Islands Credit Reduction
When a state or territory borrows from the federal government to pay unemployment benefits and fails to repay within two years, the Department of Labor imposes a credit reduction on employers there.4Internal Revenue Service. FUTA Credit Reduction For 2019, only the U.S. Virgin Islands was affected, with a reduction rate of 2.7%.5Internal Revenue Service. Schedule A (Form 940) 2019
That trimmed the normal 5.4% credit down to 2.7%, leaving USVI employers with an effective FUTA rate of 3.3%, or $231 per employee on the $7,000 base. Employers in every other state and territory paid the standard 0.6%.
Who Owed the Tax
FUTA is paid entirely by the employer and is never withheld from wages.6Internal Revenue Service. Federal Unemployment Tax A general business owed FUTA for 2019 if it met either test: at least $1,500 in total wages during any calendar quarter of 2019 or the prior year, or at least one employee working any part of a day during 20 or more different weeks in 2019 or the prior year.2Office of the Law Revision Counsel. 26 USC 3306 – Definitions
Household and agricultural employers follow different thresholds. Household employers owe FUTA once they pay $1,000 or more in cash wages to household workers in any calendar quarter. Farm employer tests turn on farmworker counts and total cash wages and are covered in IRS Publication 15.
Wages That Don’t Count Toward FUTA
Several categories of pay are excluded from the calculation and are subtracted from total wages on Form 940 before applying the rate:7Internal Revenue Service. Instructions for Form 940
- Certain fringe benefits, including the value of qualifying meals and lodging, employer contributions to health plans and HSAs, and cafeteria plan benefits.
- Employer-paid group-term life insurance that qualifies for the income exclusion.
- Employer contributions to qualified retirement plans, SIMPLE accounts (other than salary reduction contributions), and 401(k) plans.
- Dependent care assistance up to $5,000 per employee, or $2,500 if married filing separately.
Separate these amounts in your payroll records before starting the form. Missing them inflates taxable wages and the tax you calculate on them.
Filing Form 940 and Making Deposits
FUTA obligations for 2019 were reported on IRS Form 940.8Internal Revenue Service. About Form 940, Employers Annual Federal Unemployment (FUTA) Tax Return The form works through total wages, subtracts exempt payments, subtracts wages above the $7,000 per-employee cap, applies the 0.6% rate (or the higher rate for credit reduction jurisdictions), and nets out deposits already made.7Internal Revenue Service. Instructions for Form 940
The 2019 return was due January 31, 2020. Employers who deposited all FUTA on time during the year got until February 10, 2020.7Internal Revenue Service. Instructions for Form 940
Deposits are not always deferred to the annual filing. If your cumulative FUTA liability exceeds $500 at the end of any quarter, you must deposit that amount by the last day of the following month. Liability of $500 or less carries forward to the next quarter. For the fourth quarter, a remaining balance of $500 or less can be deposited or paid with Form 940 by January 31.9Internal Revenue Service. Topic No. 759, Form 940 – Filing and Deposit Requirements Most employers deposit through EFTPS.10Internal Revenue Service. EFTPS: The Electronic Federal Tax Payment System
Penalties on a Late 2019 Return
The failure-to-file penalty is 5% of the unpaid tax for each month or partial month the return is late, up to 25%.11Internal Revenue Service. Failure to File Penalty A separate failure-to-pay penalty of 0.5% per month runs on any unpaid balance, also capping at 25%.12Internal Revenue Service. Topic No. 653, IRS Notices and Bills, Penalties and Interest Charges In months where both apply, the failure-to-file penalty is reduced by the failure-to-pay amount so the overlap isn’t doubled.
The failure-to-file penalty maxes out at five months. The failure-to-pay penalty keeps accruing until the tax is paid or reaches its own 25% ceiling, and interest compounds on top. For a 2019 return being cleaned up years later, the penalty and interest stack can dwarf the original tax.