FUTA tax definition
/What is the FUTA Tax?
FUTA is an unemployment tax that is charged to employers . The FUTA acronym is short for the Federal Unemployment Tax Act. The amounts paid in by employers go into a federal fund that pays the cost of administering the unemployment insurance and job service programs in all states. The fund also pays half the cost of extended unemployment benefits during periods of high unemployment.
How to Calculate the FUTA Tax
A FUTA payment is calculated based on 0.8% of the first $7,000 of employee wages in each tax year (which is actually comprised of a 6.2% tax minus a 5.4% credit). Thus, the maximum amount of FUTA that an employer can pay per year for each employee is $56 ($7,000 x 0.008). If an employee earns less than $7,000 per year (which may be the case with a part-time person), the employer pays some amount less than the $56 maximum. However, since most employees earn far more than $7,000 per year, employers typically incur this expense during the first few months of each calendar year , and pay no further FUTA for the remainder of the year.
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State Unemployment Tax
FUTA is not the only unemployment tax that a company pays - there is also a significantly larger state unemployment tax charged for all employees, which has varying wage caps (depending on the state).
Accounting for the FUTA Tax
If employees are not involved in the production of goods, the employer should charge FUTA to expense in the period incurred. If employees are involved in the production of goods, it is possible to add this cost to products via an overhead cost pool ; by doing so, the employer recognizes the expense slightly later in the year, when the company sells the products and charges the related expense to the cost of goods sold . However, this is also a slightly more complex entry, and does not yield a significant difference in reported results over the long term.
