Understanding FUTA as a Small Business Owner

Accountant

All Small business owners are supposed to stay up to date and comply with the many obligations for state, local and even federal taxes. Most business owners normally hire a tax accountant to help them deal with issues related to tax, but an in-depth understanding of the tax system is very important for those bearing the decisive responsibility for fulfilling all the tax obligations.

Let’s now take a closer look at the FUTA Penalties likely to be faced by small businesses.

FUTA  penalties for small businesses

The Federal unemployment tax (FUTA) is normally used by the Federal government to pay compensation towards unemployment cash paid to workers who have lost their jobs. FUTA is only payable by the employers, therefore any employee is supposed to pay anything towards such tax. In fact, the tax is based on salaries of each employee. Normally FUTA ends up with about 0.8% on the first $7000 of each and every employee's salary. So the highest tax liability for an employer per employee can be about $56.00. However, if an employee is compensated only $6000 in one year, the total cost to the employer under FUTA will only be $48.00.

Although the tax rate under Federal unemployment tax is 6.2% employers who pay state unemployment tax in time can easily qualify to get a credit of 5.4% out of this. Therefore, the most effective tax rate comes to 0.8%. If you pay interest or penalties on state taxes, it can never be included to claim any credit. Federal unemployment tax is normally paid every year. An individual should file Form 940 in order to pay FUTA tax. However, if your total tax payable surpasses $500, then you have to make the payments in advance. And don’t forget that IRS will levy a penalty as well as interest.

It is vital to note that FUTA tax is actually payable even when you have household employees. If you pay salaries in cash of $1000 or even more, in just any calendar quarter, you have to file form 940 and also pay FUTA tax. But if you only have household employees, you can simply pay this particular tax on your personal tax return. There is really no point of making different payments under FUTA tax.

If in any case you are an agricultural employer, and always pay cash wages of $20,000 or even more to your workers in the farm and during a calendar quarter annually, it is obligatory for you to always file form 940 and pay the all taxes.

If you happen to file your return late or maybe delay paying your taxes, without a realistic cause, IRS can immediately impose interest or penalties for such negligence. So make sure that you attach an explanation to your file in case you are filing late. Just keep in mind that there are severe penalties for fraudulent returns, filing false returns and for failure to keep all the records. If you feel unsure, always seek the services of a professional tax preparer.

January 31^st is the due date for filing Form 940. However, if you have successfully deposited all the tax when due, you can easily file the form before February 12^th. Since the tax liability is for every quarter, all you have to do is pay the taxes quarterly. If an individual’s quarterly liability is less than $500, then he or she can simply carry forward that amount for the next quarter. Make sure you don’t send checks directly to IRS. You have deposit this sum with the Federal Reserve Bank near you or with any other authorized financial institution.

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

Make no mistake, IRS is very aggressive and strict on 940 taxes and you are not discharged even when in bankruptcy. It has very extensive powers to collect all these taxes. IRS can easily impose serious penalties and make an individual personally responsible for paying the relevant tax. IRS can also take stern action against any other individual who they believe is blamable for the failure. The account receivables can also be seized by IRS, hence completely destroying the business potential for the employers.

It is better to always process the payments under Federal unemployment tax (FUTA) with the payroll, so that the obligation under FUTA can be discharged swiftly and with very little tension and cost.

I’m sure that you don’t want to find yourself in the claws of IRS. And we all know that all you need to do right now is find a tax professional who will help you fully understand FUTA. You can attest to the fact that nothing beats experience and that is the main reason why most of my clients keep coming back for my services. Don’t allow yourself to be an exception. Your business deserves to grow to another level. But this can only be made possible if you make the choice of contacting me today and getting to learn more about IRS and its requirements with regards to FUTA when it comes to small business owners.