Employees are the lifeblood of any business. They are the very fuel that keeps a business running and earning profits along the way. The strength of the employees is a sign of prosperity and growth for the company. However, many frustrating hours are spent trying to determine salary figures and related tax obligations.
To fulfill these obligations as detailed by the IRS, businesses are advised to find a tax professional for determining payroll taxes efficiently. The professional tax preparer and accountants at Falisha Griffin can help you do away with most, if not all, complexities involved in filing taxes relating to the payroll. However, finding a tax preparer and handing the case to the professionals is not enough. You must also know about all the tax related terms to ensure that you do too have an understanding of what’s going on behind the scenes and are on the same page as the professionals managing your payroll taxes.
Here, we will inform you about a tax term that is especially pertinent to small business owners. We know it as FUTA, or the Federal Unemployment Tax Act.
FUTA is simply a federal tax provision that is implemented to make provisions of funds paid to employees who have lost their jobs. In most cases, employers are required to pay both state and federal unemployment taxes. State unemployment tax is paid to unemployment tax agencies in the state where the company is located. A list of the state tax agencies including their contact details is given in the Publication 926, Household Employer's Tax Guide. FUTA, on the other hand, is paid when filing federal tax returns using Form 940.
Form 940 must be filed by firms that fall in either, or both, of the following two categories.
1. Paid wages of $1,500 or more during a quarter of this year or the preceding year
2. Employed one or more employees for some parts of the day in 20 or more weeks in the current or previous year.
Note that the above applies to all employees, whether they are employed part time, full time, or temporary. In case you own a small business that employs household employees such as maids, housekeepers, gardeners, babysitters, and others, you would still be liable to pay FUTA taxes as long as the wages paid in a quarter exceed $1,000 in the present or previous year.
Calculating federal unemployment tax may look complex, but it is no rocket science. The rate of FUTA tax for 2015 is 6.0%. You are liable to pay FUTA tax on the first $7,000 paid to the employee during a year, after deducting payments that are exempt from FUTA tax.
The following types of income are exempt from FUTA tax:
1. Fringe benefits such as contribution to health or accident insurance plans, health saving accounts, qualified moving expenses, and a cafeteria plan that is offered in pursuant to the Section 125 of Internal Revenue Code.
2. Employer's contribution for a qualified retirement pension plan such as 401 (K).
3. Group Life Insurance
4. Dependent care payments of $5,000 paid to an employee ($2,500 if married and filing separately)
5. Other non-cash payments that are exempted from FUTA taxes
IRA allows employers to relieve a maximum tax credit of up to 5.4% against the FUTA tax. In order to determine the amount due to the federal revenue authority, you must first add the first $7,000 of the employee's annual wages during the quarter and multiply it by a factor of 0.06. Note that you are required to make the payment when the cumulative FUTA tax liability comes to around $500.
Let’s say you paid $10,000 to Employee A, $5,000 to Employee B, and $3,000 to Employee C. For simplicity’s sake, let us suppose that none of the payments were exempt from FUTA taxes. In order to determine the liability for FUTA tax, you must sum up the first $7,000 paid to each employee during the quarter.
1. $7,000 Employee A
2. $5,000 Employee B
3. $3,000 Employee C
The total comes to $15,000. You must now multiply this figure by 0.06. So, the taxable amount during the quarter comes to $90. Since, the amount is less than $500, it will need to be carried over to the next period.
The due date for filing form 940 is announced by the IRS once a year. In case your net FUTA tax liability for the quarter is $500 or higher, you can file the form with the IRS by February 1, 2016. Late filing of the tax results in imposition of penalties. You can avoid the penalties by filing the form on time and also ensuring that the form contains no errors or accuracies. Ensure that the correct amount is paid to the IRS within the due date, or risk incurring penalties.
You can make payments of your FUTA tax amount using the Electronic Federal Tax Payment System® tax payment (EFTPS). In case your business is new, you will be automatically enrolled in the EFTPS when you sign for your Employer Identification Number, or EIN. You must submit the deposits by 8 PM EST the day before the tax is due.
In case, you are unable to submit the tax amount on time through EFTPS, you can still submit the amount to Federal Tax Collection Service (FTCS) through same-day payment method. Your financial service provider may charge a fee for the same day payment. You need to provide certain information to your financial service provider about making payment to the IRS. We can help you navigate these waters - just click the link below to get in touch with our offices.
On a final note, you can rely on highly experienced accountants and tax preparers based in York, PA to handle all your accounts related tasks involved in filing tax returns. Our professional tax preparers can ensure full compliance with all the state and federal rules and regulations when filing the taxes for your small business.
