As a small business owner, it becomes more important to determine the right salary figure for your employees, keeping the tax obligations for FUTA in mind. Without a proactive approach, you are likely to fall behind, with your business profits being adversely affected in time. This is where the role of a tax preparer comes in. You can work this out with a professional to ensure you are paying exactly what you are liable to pay, without eating into your profits.
There are different types of payroll taxes that you as an employer have to take care of. Here, we will discuss solely about FUTA and how it should be calculated. Although you can do this by yourself, if you find a tax professional for calculating FUTA, you can sit at ease without the need of understand and learning about IRS. We at Richard Rogers are offering you exactly that. Our professional accountants and tax preparers will help you calculate the tax obligations related to FUTA and determine the right salary figure for each of your employee entitled for it. But before you set out to hand over everything to a professional, we believe it is your right to learn about the tax-related procedures so you can take informed decisions.
What Is FUTA Tax and Form 940?
FUTA is short for Federal Unemployment Tax Act. It is an employment or payroll tax paid by the employer. While the employer is responsible for paying FUTA tax, the obligations are based on the salary or wages of the employees. This law provides the regulation for how the state keeps up with their unemployment benefit program, offering a certain income for people who have lost their jobs. FUTA is charged as a federal tax provision.
As a general rule of thumb, FUTA tax is calculated as 0.6% of the first $7,000 per year earned by the employee. This means that the maximum cost the employer would incur for FUTA tax in one year per employee would be $7000 x 0.6% = $42. In case the employee only made $5,000 for salary in a year’s time, the cost incurred by the employer will be $5000 x 0.6% = $30.
While that’s how FUTA is calculated in the rest of the United States, businesses based in El Cajon, CA will have different calculations for their FUTA taxes. For California, the percentage for FUTA tax is 2.1%. According to this, the maximum tax obligations paid by the employers in this state are as high as $147 per employee per year.
If you think you are alone, businesses based in Ohio and Virgin Islands have the same FUTA rate of 2.1% as well. The rate is highest for businesses in Connecticut, sitting at 2.7%; that translates to $189 max FUTA tax per employee in an year. Thus, it is important for small businesses in California to calculate the amount wisely to avoid errors because they are already paying higher than majority states.
Keeping the double-entry system of accounting in mind, recording of FUTA tax can be done in two ways:
It will be recorded as a liability
A cost recorded as an immediate expense (also referred to as product cost sometime)
The cost incurred on FUTA tax by the employer on employees involved in the production and manufacturing activities will be recorded as product cost, whereas the cost on FUTA tax for employees involved in administrative and selling activities should be recorded as an expense with their wages and salaries as administrative and selling expense.
On the other hand, form 940 is a form issued by the IRS which requires annual submission. FUTA taxes are calculated and stated by the employer in this form. It is important to remember that even though form 940 is submitted once a year, the tax payments based on the calculated FUTA tax are made on a quarterly basis. You can find the detailed 940 Tax form on the IRS website. You can even ask your tax preparer to show you the form 940 once the taxes are calculated before the submission.
How Is FUTA Tax Calculated?
Some employers find calculating FUTA extremely difficult and find tax preparer or accountants to help them with it. If you are one of them, working with a professional might be the right decision for you too. However, it is still important that you are aware how FUTA tax is calculated to stay informed.
Since we are talking about businesses based in El Cajon, CA, we will keep the 2.1% in mind for the calculation steps. But before we jump to the steps, it is important that you know the type of employee income that are exempt from this tax obligation.
If you offer fringe benefits to your employees, they are exempt from FUTA tax calculations. This includes health saving accounts, insurance plans (health or accident-related), a cafeteria plan, or qualified moving expenses.
If you are making a contribution in any qualified retirement plan for your employee, such as 401 (K).
Group life insurance.
Payments made for the care of dependent of $5000 paid to an employee (if married, it is applicable on $2,500 and requires separate filing).
Other form of non-cash payments that are exempted from FUTA taxes.
Once you have exempted all of these from the tax obligation calculation, the following steps are carried out for the calculation of FUTA taxes.
Step 1: Starts with one employee at a time. Calculate total gross wages, including tips, salaries, commissions, and bonuses. Reimbursement for business expenses is not included in this calculation.
Step 2: Once you have the total wage or salary figure in hand, apply the percentage (which is 2.1% in your case). For instance, if the total wage earned by an employee totals to $9000, 2.1% will be applied on $700 (as that’s the maximum amount) to calculate the tax. In this case, the tax will be $147. However, if the gross salary is $6,500, the taxable amount will be $136.5.
For the filing purpose, the tax obligation for each employee should be summed up to enter on the form 940 when it is submitted annually.
From calculating to filing, all of this can be easily carried out if you let professionals handle your work. Our competent accountants and tax preparers will help you with calculation as well as the submission of FUTA to ensure no obligation is left out. If you are looking for a tax professional for calculating FUTA, among other things, connect now with Richard Rogers in El Cajon, CA by clicking the link below!
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