FUTA Credit

We know that the federal government requires employers to pay a payroll tax on every employee.  It’s to fund the unemployment system run by the federal government.  The rate is 6.2% on the first $7000 of wages for each employee.  That comes to $434 per year per employee.  It’s called the Federal Unemployment Tax, or FUTA for short.

States also have unemployment systems that work alongside the federal system.  Consequently the States have their own unemployment taxes.  Employers end up paying into both systems. However, there’s a way to get credit for paying into the state system so employers don’t have to pay quite so much into the federal system.  Yes, the IRS is giving employers a break.  That means more money in employers’ pocket.

It’s  called the FUTA credit, which decreases the amount of FUTA paid by .054%.  It depends on how much unemployment tax was paid into a particular state system.   FUTA tax can be reduced  on IRS form 940 based on the amount paid in state taxes for unemployment.