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    Qualify for the Federal Unemployment Tax Act (FUTA) tax credit

    Article ID: 1000088

    Overview

    This article explains how to qualify for the Federal Unemployment Tax Act (FUTA) tax credit.

    Assumptions

    You want to know how to qualify for the Federal Unemployment Insurance Act (FUTA) credit.

    Expected Outcome

    You will determine whether you qualify for the FUTA tax credit.

    Details

    The following information explains the qualifications for the FUTA tax credit:

    • Most employers qualify for the FUTA tax credit of 5.4%. The full credit reduces the FUTA tax rate from 6.0% to 0.6%.
    • If your company is subject to state unemployment insurance (SUI) tax, you generally qualify for the FUTA credit.
    • To qualify for the FUTA credit, you must pay all the SUI tax you owe for a calendar year by the due date for your Form 940.
    • If your company is exempt from SUI tax, but is subject to FUTA tax, you do not qualify for the FUTA credit.
    • If all of your employees are individually exempt from SUI tax, but subject to FUTA tax, you do not qualify for the FUTA credit.
    • If any individual employees (for example, officers or owners) are exempt from SUI tax, only their wages are excluded from the FUTA credit. Whether your company qualifies for the FUTA credit depends on the number of employees who are subject to or exempt from SUI tax, and their wages. The calculation is done when you generate Form 940 (on line 10).
    • Due to the complexity of calculating FUTA, early payments are estimated. Exact amounts cannot be determined until all state unemployment payments have been paid and the IRS releases information on credit reduction states at year-end.

    This also applies the District of Columbia, Puerto Rico, and the U.S. Virgin Islands.

    Several states still have outstanding SUI federal loans. As a result, employers in these states will see an increase in their FUTA taxes that are effective retroactively to January 1. This means that even if you paid all of your state unemployment taxes on time, you will now owe the federal government additional money to make up for the new, retroactive rate change.

    See the IRS website for more information.

    For information about the 2011 FUTA credit see 2011 Federal Unemployment Tax Act (FUTA) Credit Reductions.

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