What is the FUTA tax credit and how does it work?
FUTA is an employer only tax, meaning the employee is not responsible for any portion of this tax. The statutory tax rate is 6.2 percent of the employee’s wages, up to the 2008 FUTA wage base of $7,000. An employer typically only pays an effective rate of 0.8 percent because employers receive a 5.4 percent credit for the state unemployment taxes they pay or are treated as paying. Example 1: For an employee with no prior wages who earns $1,000 during the payroll period, there is no FUTA withholding since FUTA is an employer only tax. The FUTA tax equals $8.00 ($1,000 x 0.8%). Example 2: For an employee with 2008 year-to-date wages of $6,900 who earns $1,000 during the payroll period, this employee will reach the 2008 FUTA wage base during the period. Therfore the amount subject to FUTA is reduced from $1,000 to $100 ($7,000 minus $6,900 equals $100), resulting in an employer only FUTA tax of $0.80 ($100 x 0.8%). The general rule is that for any employee who earns more than $7,000 during
