Having a small business? Beware of FUTA penalties

The Federal unemployment tax is used by the Federal government to pay compensation towards unemployment money paid to workers losing their jobs.  FUTA is payable by the employers only, so any employee is not required to pay anything towards such tax.  The tax is based on wages of each employee.  Usually FUTA ends up with the 0.8 per cent on first $7000 of each employee’s salary.  So the maximum tax liability for the employer per employee can be $56.00.  However if an employee is paid only $6000 during a year, the cost to the employer under FUTA will be $48.00.

Even though the tax rate under FUTA is 6.2 per cent, employers who pay timely state unemployment tax can qualify to receive a credit of 5.4 per cent out of this.  So the effective tax rate comes to 0.8 per cent.  If you pay penalties or interest on state taxes, that cannot be included to claim credit.  FUTA tax is paid annually.  You should file Form 940 to pay FUTA tax.  If your total tax payable exceeds $500, you should make the payments in advance.  If your tax payable exceeds $500, IRS will levy a penalty as well as interest.

FUTA tax is payable even though you have household employees.  If you pay wages in cash of $1000 or more, in any calendar quarter, you must file form 940 and pay FUTA tax.  However if you have only household employees, you can pay this tax on your individual tax return.  There is no need to make separate payments under FUTA tax.

If you are an agricultural employer, and you paid cash wages of $20,000 or more to workers in the farm and during a calendar quarter in a year, it is compulsory for you to file form 940 and pay the taxes.

If you file your return late or delay paying your taxes, without a reasonable cause, IRS can impose penalties or interest for such neglect.  So if you are filing late, you must attach an explanation to your return.  There are penalties for filing false returns, fraudulent returns and for failure to keep records.

The due date for filing Form 940 is January 31.  However, if you have deposited all the tax whenever due, you can file the form before February 12.  As the tax liability is for every quarter, you need to pay the taxes quarterly.  If your quarterly liability is less than $500, you can carry forward that amount for the next quarter.  Please do not send checks directly to IRS.  You need to deposit this amount with the Federal Reserve Bank in your area or with an authorized financial institution.

There are certain employments which are exempt under FUTA.  These include certain family employments, certain fishing activities, non-cash payments made to farm workers or household services, payments made for sickness or injury to workers, payments for group term life insurance etc.

IRS is very strict and aggressive on 940 taxes and you are not discharged even in a bankruptcy.  It has extensive powers to collect these taxes.  IRS can impose severe penalties and make the owner or individual personally responsible for paying the tax.  IRS can also take action against any other person who they think responsible for the failure.  The account receivables and other property can be seized by IRS, destroying the business prospective for the employers.

Its better to process the payments under FUTA with the payroll, so that the responsibility under FUTA can be discharged quickly and with a little cost and tension.

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