As an employer, you must pay federal unemployment (FUTA) tax on
amounts up to $7,000 paid to each employee as wages during the calendar year.
The rate of tax imposed is 6% but can be reduced by a credit (described below).
Most employers end up paying an effective FUTA tax rate of 0.6%. An employer
taxed at a 6% rate would pay FUTA tax of $420 for each employee who earned at
least $7,000 per year, while an employer taxed at 0.6% pays $42.
Tax credit
Unlike FICA taxes, only employers — and not employees — are
liable for FUTA tax. Most employers pay both federal and a state unemployment
tax. Unemployment tax rates for employers vary from state to state. The FUTA
tax may be offset by a credit for contributions paid into state unemployment
funds, effectively reducing (but not eliminating) the net FUTA tax rate.
However, the amount of the credit can be reduced — increasing
the effective FUTA tax rate —for employers in states that borrowed funds from
the federal government to pay unemployment benefits and defaulted on repaying
the loan.
Some services performed by an employee aren’t considered
employment for FUTA purposes. Even if an employee’s services are considered
employment for FUTA purposes, some compensation received for those services —
for example, most fringe benefits — aren’t subject to FUTA tax.
Recognizing the insurance principle of taxing according to
“risk,’’ states have adopted laws permitting some employers to pay less. Your
unemployment tax bill may be influenced by the number of former employees
who’ve filed unemployment claims with the state, the current number of
employees you have and the age of your business. Typically, the more claims
made against a business, the higher the unemployment tax bill.
Here are four ways to help control your unemployment tax costs:
1. If your state permits it, “buy down” your
unemployment tax rate. Some states allow employers to
annually buy down their rate. If you’re eligible, this could save you
substantial unemployment tax dollars.
2. Hire conservatively and assess candidates. Your
unemployment payments are based partly on the number of employees who file
unemployment claims. You don’t want to hire employees to fill a need now, only
to have to lay them off if business slows. A temporary staffing agency can help
you meet short-term needs without permanently adding staff, so you can avoid
layoffs.
It’s often worth having job candidates undergo assessments
before they’re hired to see if they’re the right match for your business and
the position available. Hiring carefully can increase the likelihood that new
employees will work out.
3. Train for success. Many
unemployment insurance claimants are awarded benefits despite employer
assertions that the employees failed to perform adequately. This may occur
because the hearing officer concludes the employer didn’t provide the employee
with enough training to succeed in the job.
4. Handle terminations carefully. If you
must terminate an employee, consider giving him or her severance as well as
outplacement benefits. Severance pay may reduce or delay the start of
unemployment insurance benefits. Effective outplacement services may hasten the
end of unemployment insurance benefits, because a claimant finds a new job.
If you have questions about unemployment taxes and how you can
reduce them, contact us. We’d be pleased to help.
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