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How to help reduce your Unemployment Tax Liability

As a company grows it more than likely will need to hire employees and pay those employees wages.  An employer that pays wages has a responsibility to pay payroll taxes and report those taxes to the IRS on quarterly and annual forms.  This post will look specifically at Federal Unemployment Tax (FUTA) taxes and ways businesses can attempt to reduce their future FUTA tax liability.

Anyone who receives wages from an employer is familiar with the payroll taxes that come out of their paychecks every pay period.  These FICA taxes are paid 50% by the employer and 50% by each employee.  That is why Social Security and Medicare taxes are taken out of employee’s paychecks.  Another payroll tax that employers pay is the Federal Unemployment Tax (FUTA). 

All employers are required to pay FUTA tax if they meet the following requirements;

  • You paid more than $1,500 to employees during at least one quarter of the calendar year, and
  • You’ve had one or more employees during 20 or more different weeks of the year.  Full-time, part-time, and temporary workers all count and days worked do not have to be full days. 

The FUTA tax is paid entirely by the employer.  Tax is paid on each employee up to $7,000 in gross wages during a calendar year.  These taxes are then used to pay unemployment compensation claims to employees who have been laid off.  Unemployment benefits are not available to employees who voluntarily leave their jobs.

The tax rate for the federal unemployment tax is 6%.  However, most employers pay both federal and state unemployment taxes.  These state unemployment reserves are funded by the federal unemployment fund.  As an employer, if the state you operate in collects a state unemployment tax, a credit is assessed to offset federal unemployment tax paid to state unemployment funds.  This tax credit reduces federal unemployment by 5.4%, making the effective federal unemployment tax rate 0.6%. 

There are forms of compensation (fringe benefits) employers pay employees that are exempt from federal unemployment tax.  Some examples of these benefits include expense reimbursement, health insurance, life insurance, dependent care costs, and 401(k) benefits.

FUTA payments are quarterly with payments due the last day of the month following the end of the quarter.

  • April 30th for 1st quarter
  • July 31st for 2nd quarter
  • October 31st for 3rd quarter
  • January 31st for 4th quarter

However, you may not have to pay every quarter.  At the end of any given quarter if your unemployment tax liability is less than $500 you are not required to pay.  The amount can be carried over to the following quarter.  Once the total liability amasses $500 the tax must be paid in that quarter.  The IRS requires an annual reconciliation, Form 940 Employer’s Annual Federal Unemployment (FUTA) Tax Return to verify the employers’ federal unemployment tax liability has been paid in full for the year.

As an employer, there are ways to ways to help control your unemployment tax costs

  • Buy down your state unemployment tax rate – Many states allow employers to make a “voluntary contribution” towards the end of the calendar year (often after 3rd Quarter) to reduce state unemployment rates for the following year.  This amounts to an upfront payment to the state unemployment insurance fund, this could be a potential tax saving payment for the following year.  Talk with one of our Wegner tax professionals to determine if making a voluntary contribution would be beneficial to you for the following year.
  • Hiring the right candidates – As an employer, your unemployment liability is based partially on the number of unemployment claims filed.  Your hiring procedures can have an impact on the number of these claims filed.  By carefully assessing job candidates and projecting how these future employees will fit with your company’s culture can help you retain employees and prevent turnover.
  • Invest in training current staff – Devoting resources to continuing education and training your employees will provide you with a more skilled and capable staff.  Reducing the chances that you will have to fire an employee for not being able to perform their job duties.
  • Handle Terminations Carefully – Inevitably as an employer, there will be a time when you have to fire an employee, the way you handle these terminations can affect the unemployment tax.  Consider offering severance or outplacement benefits for terminated employees.  These benefits can shorten the time frame that unemployment benefits are being claimed.
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