Chapter 14
Federal Unemployment (FUTA) Tax

The Federal Unemployment Tax Act (FUTA), with state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs. Most employers pay both a Federal and a state unemployment tax. A list of state unemployment tax agencies, including addresses and phone numbers, is available in Pub. 926, Household Employer's Tax Guide. Only the employer pays FUTA tax; it is not deducted from the employee's wages. For more information, see the Instructions for Form 940.

Note: Services rendered after December 20, 2000, to a federally recognized Indian tribal government (or any subdivision, subsidiary, or business wholly owned by such an Indian tribe) are exempt from FUTA tax, subject to the tribe's compliance with state law. For more information, see Announcement 2001-16 and Code section 3309(d). You can find Announcement 2001-16 on page 715 of Internal Revenue Bulletin 2001-8, at www.irs.gov.

Use the following three tests to determine whether you must pay FUTA tax. Each test applies to a different category of employee, and each is independent of the others. If a test describes your situation, you are subject to FUTA tax on the wages you pay to employees in that category during the current calendar year.

1. General test.
   
   You are subject to FUTA tax in 2002 on the wages you pay employees who are not farmworkers or household workers if in the current or preceding calendar year:
1. You paid wages of $1,500 or more in any calendar quarter in 2001 or 2002 or
2. You had one or more employees for at least some part of a day in any 20 or more different weeks in 2001 or 20 or more different weeks in 2002.

2. Household employees test.
   
   You are subject to FUTA tax only if you paid total cash wages of $1,000 or more (for all household employees) in any calendar quarter in 2001 or 2002. A household worker is an employee who performs household work in a private home, local college club, or local fraternity or sorority chapter.

3. Farmworkers test.
   
   You are subject to FUTA tax on the wages you pay to farmworkers if:
1. You paid cash wages of $20,000 or more to farmworkers during any calendar quarter in 2001 or 2002 or
2. You employed 10 or more farmworkers during at least some part of a day (whether or not at the same time) during any 20 or more different weeks in 2001 or 20 or more different weeks in 2002.

Computing FUTA tax. For 2001 and 2002, the FUTA tax rate is 6.2%. The tax applies to the first $7,000 you pay each employee as wages during the year. The $7,000 is the Federal wage base. Your state wage base may be different. Generally, you can take a credit against your FUTA tax for amounts you paid into state unemployment funds. This credit cannot be more than 5.4% of taxable wages. If you are entitled to the maximum 5.4% credit, the FUTA tax rate after the credit is 0.8%.

Successor employer. If you acquired a business from an employer who was liable for FUTA tax, you may be able to count the wages that employer paid to the employees who continue to work for you when you figure the $7,000 FUTA wage base. See the Instructions for Form 940.

Depositing FUTA tax. For deposit purposes, figure FUTA tax quarterly. Determine your FUTA tax liability by multiplying the amount of wages paid during the quarter by .008 (0.8%). Stop depositing FUTA tax on an employee's wages when he or she reaches $7,000 in wages for the calendar year. If any part of the wages subject to FUTA are exempt from state unemployment tax, you may have to deposit more than the tax using the 0.8% rate. For example, in certain states, wages paid to corporate officers, certain payments of sick pay by unions, and certain fringe benefits, are exempt from state unemployment tax.

If your FUTA tax liability for a quarter is $100 or less, you do not have to deposit the tax. Instead, you may carry it forward and add it to the liability figured in the next quarter to see if you must make a deposit. If your FUTA tax liability for any calendar quarter in 2002 is over $100 (including any FUTA tax carried forward from an earlier quarter), you must deposit the tax by electronic funds transfer (EFTPS) or in an authorized financial institution using Form 8109, Federal Tax Deposit Coupon. See section 11 for information on these two deposit methods.

Note: You are not required to deposit FUTA taxes for household employees unless you report their wages on Form 941 or 943. See Pub. 926, Household Employer's Tax Guide, for more information.

When to deposit. Deposit the FUTA tax by the last day of the first month after the quarter ends.

If your liability for the fourth quarter (plus any undeposited amount from any earlier quarter) is over $100, deposit the entire amount by the due date of Form 940 or Form 940-EZ (January 31). If it is $100 or less, you can either make a deposit or pay the tax with your Form 940 or 940-EZ by January 31.

Reporting FUTA tax. Use Form 940 or 940-EZ, Employer's Annual Federal Unemployment (FUTA) Tax Return, to report this tax. The IRS will mail a preaddressed Form 940 or 940-EZ to you if you filed a return the year before. If you do not receive Form 940 or 940-EZ, you can get the form by calling 1-800-TAX-FORM (1-800-829-3676).

Form 940-EZ requirements. You may be able to use Form 940-EZ instead of Form 940 if (1) you paid unemployment taxes ("contributions") to only one state, (2) you paid state unemployment taxes by the due date of Form 940 or 940-EZ, and (3) all wages that were taxable for FUTA tax purposes were also taxable for your state's unemployment tax. For example, if you paid wages to corporate officers (these wages are subject to FUTA tax) in a state that exempts these wages from its unemployment taxes, you cannot use Form 940-EZ.

Household employees. If you did not report employment taxes for household employees on Form 941 or 943, report FUTA tax for these employees on Schedule H (Form 1040), Household Employment Taxes. See Pub. 926 for more information.

Special Rules Chart - 1

Special Rules Chart - 2

Special Rules Chart - 3

Special Rules Chart - 4

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