Federal unemployment tax act (FUTA)

Gusto handles all FUTA payments and filings for our payroll customers. The IRS has rules for when FUTA payments are due:

• If your FUTA liability exceeds $500 in any given quarter payment must be remitted by the last day of the month following quarter end.
• If your FUTA tax liability is $500 or less in a quarter, it's carried forward to the next quarter. The tax liability continues to carry forward until your cumulative FUTA tax liability is more than $500. At that point, a deposit for your FUTA tax is due in that quarter.
• If your total FUTA tax liability for the year is $500 or less, the tax gets paid with your Form 940 by January 31.

Employers in California and New York will be assessed a general FUTA credit reduction of 0.9% on wages paid to employees for work attributed to any of these states in the 2024 tax year.

• The Virgin Islands have a credit reduction of 4.2%

The reduction will cause employers to pay an effective tax rate of 0.6% + the FUTA credit reduction, or up to $105 for each employee when applied to the federal unemployment-taxable wage base of $7,000.

Every year, some states are classified as credit reduction states. These states took a loan from the federal government to help pay their state unemployment insurance benefits. If the states are not on time in paying back that loan, the federal government reduces the FUTA credit (that 5.4% from above) given to employers.

Employers in these states will owe a higher amount of tax that will be paid with the annual Federal Unemployment Form 940 in January.

The US Department of Labor finalizes the list of credit reduction states every year in November. You can read more about this credit reduction on the IRS website.

When a business or employee(s) are exempt from state unemployment, the business typically is no longer able to apply the 5.4% FUTA Credit and is liable for additional FUTA. Check out pages 3 and 4 of this IRS reference for more information.

The most common scenarios for why a business would be liable for additional FUTA are outlined below:

• Businesses with all employees exempt to state unemployment (SUI)
  • Employers that do not pay into state unemployment at all are automatically required to pay the additional 5.4% ($378) in FUTA tax on each employee's wages.
• Businesses with a combination of employees that pay into to state unemployment & employees that are exempt to state unemployment 
  • Employers that pay into state unemployment for some employees but not others may be liable for up to the additional 5.4% in FUTA Taxes.
  • The amount of additional FUTA tax is determined by the Worksheet for Line 10 of Form 940 (found on page 12 here). The amount of additional tax due depends on how much the employer paid into state unemployment taxes. If the business paid enough into state unemployment, they may not be liable for additional FUTA tax at all. Our system automatically makes these calculations as required.
• Businesses that paid state unemployment tax late 
  • Employers that paid state unemployment tax late may be liable for additional FUTA tax, up to the maximum 6% rate. This is also determined by the Worksheet for Line 10 of Form 940 (found on page 12 here). Our system assumes that all state unemployment tax was paid timely.