# Two Methods to Calculate FUTA Tax Liability

In your business, you have a lot of responsibility, like casting the vision for your future and managing payroll. You have to lead your team and deal with the nitty-gritty details most people don’t actively think about. One of these areas is the taxes you have to pay, including social security, medicate federal income, and of course, FUTA.

## What is FUTA?

FUTA, or the Federal Unemployment Tax Act, was established as part of the Social Security Act to help avoid a disaster as great as the Great Depression again. The concept is simple – you pay the federal tax on a quarterly basis, and this money fills your unemployment fund. You also contribute to it through SUTA or the State Unemployment Tax Act. When an employee is let go from your company at no fault of their own, they can file for unemployment benefits, withdrawing money from this fund.

## How is calculated?

There are actually several ways to determine what your quarterly taxes will be for FUTA. To get started, you need to know a few numbers:

• The FUTA tax rate stands at 6%
• The maximum credit for FUTA you can receive is 5.4%, which you can earn by paying your state unemployment taxes in full and on-time and if your business files its taxes in a state that is not classified as a credit reduction state
• The FUTA tax is applicable to the first \$7,000 you pay an employee during the year

For more information on whether you file in a credit reduction state and how to figure out SUTA, you need to check out your state’s unemployment guidelines.

### Calculation Method 1:

• Begin by adding all the applicable wages paid during the quarter. Some may reach the max of \$7,000, but others may be lower.
• Once you have the quarterly wage total, multiply this number by 0.006, representing the 0.6% remaining of the tax rate after the tax credit (assuming you received the maximum. If not, simply subtract your credit rate from 6% and multiply your wages by that number

### Calculation Method 2:

• Begin with determining your maximum allowable tax rate (your credit subtracted from 6%) and then multiply your employee’s wages by the remaining rate individually