Unemployment Tax Obligations when Your Small Business Has Employees

When your small business has employees, in addition to your FICA tax and federal and state income tax withholding, reporting, and payment requirements, you also have federal and state unemployment tax obligations. The unemployment tax is paid by the employer.

The federal unemployment tax (FUTA) applies to the first $7,000 you pay each employee during the calendar year. According to the IRS, the FUTA tax rate is 6.2% through June 30, 2011 and is scheduled to decrease to 6.0% starting July 1, 2011.

The federal unemployment tax is filed annually on Form 940 '" Employer's Annual Federal Unemployment (FUTA) Tax Return. The general requirement is that you must file and pay federal unemployment tax if you pay $1,500 or more to your employees in any calendar quarter of the year, or if you have one or more employees for at least part of a day in any 20 or more different weeks during the year.

You get a credit against your FUTA taxes for the state unemployment taxes you pay. The credit is normally 5.4%, so you would effectively be paying a FUTA rate of 0.8% on the first $7,000 of wages paid to each employee, or a total of $56 per employee per year. But if the state has not repaid money it borrowed from the federal government to pay unemployment benefits, your credit is reduced. These states are called "credit reduction states". These states are determined by the U.S. Department of Labor each year and are indicated in the Instructions for Form 940.

If your small business has many employees, you may have to make quarterly payments of federal unemployment tax. If your liability is more than $500 for a quarter, you have to deposit the taxes due by the last day of the month after the end of the quarter. If your liability is $500 or less, you carry the amount over to the next quarter until your liability is more than $500 and then you make the deposit.

Form 940 is due by January 31 of the year after you paid wages subject to federal unemployment tax. You can file Form 940 electronically using 940 e-file and make the payment using the Electronic Federal Tax Payment System.

Each state has its own unemployment program, which may go by different names depending on the state. If you pay wages, you need to register with your state's unemployment system, file wage reports, and make the necessary unemployment tax payments according to your state's rules and procedures. You can find links to State Unemployment Tax Agencies on the IRS website.

Sources:
Electronic Federal Tax Payment System '" U.S. Department of the Treasury
Employment Taxes - 944 e-file, 941 e-file and 940 e-file - IRS
Form 940 '" Employer's Annual Federal Unemployment (FUTA) Tax Return - IRS
Instructions for Form 940 '" IRS
State Unemployment Tax Agencies - IRS