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How do I calculate FUTA tax liabilities?

how do i calculate tax liability

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Computing FUTA Tax - For 2007, the FUTA tax rate is 6.2%. The tax applies to the first $7,000 that you pay to each employee as wages during the year. The $7,000 is the federal wage base. Your state wage base may be different. Generally, you can take a credit against your FUTA tax for amounts that you paid into state unemployment funds. This credit cannot be more than 5.4% of taxable wages. If you are entitled to the maximum 5.4% credit, the FUTA tax rate after the credit is 0.8%.

Depositing FUTA Tax - For deposit purposes, figure FUTA tax quarterly. Determine your FUTA tax liability by multiplying the amount of taxable wages paid during the quarter by .008 (0.8%). Stop depositing FUTA tax on an employee's wages when he or she reaches $7,000 in taxable wages for the calender year. If any part of the wages subject to FUTA is exempt from state unemployment tax, you may have to deposit more than the tax using the 0.8% rate. For example, in certain states, wages paid to corporate officers, certain payments of sick pay by unions, and certain fringe benefits, are exempt from state unemployment tax. Deposit the FUTA tax by the last day of the first month that follows the end of the quarter. If the due date (below) for making your deposit falls on a Saturday, Sunday, legal holiday, you may make your deposit on the next business day.

If your FUTA tax liability for a quarter is $500.00 or less, you do not have to deposit the tax. Instead, you may carry it forward and add it to the liability figured in the next quarter to see if you must make a deposit. If your FUTA tax liability for any calender quarter in 2007 is over $500.00 (including any FUTA tax carried forward from an earlier quarter), you must deposit the tax by electronic funds transfer (EFTPA) or in an authorized financial institution using Form 8109, Federal Tax Deposit Coupon.

Social Security and Medicare Taxes - have different rates and only the social security tax has a wage base limit. The wage base limit is the maximum wage that is subject to the tax for the year.

Determine the amount of withholding for social security and Medicare taxes by multiplying each payment by the employee tax rate. There are no withholding allowances for social security and Medicare taxes.

The employee tax rate for social security is 6.2% (amount withheld). The employer tax rate for social security is also 6.2% (12.4% total). The 2006 wage base limit was $94,200. For 2007, the wage base limit is $97,500.

The employee tax rate for Medicare is 1.45% (amount withheld). The employer tax rate for Medicare tax is also 1.45% (2.9% total). There is no wage base limit for Medicare tax; all covered wages are subject to Medicare tax.

Depositing Taxes - In general, you must deposit federal income tax withheld and both the employer and employee social security and Medicare taxes plus or minus any prior period adjustments to your tax liability (minus any advance EIC payments). You must deposit by using the Electric Federal Tax Payment System (EFTPS) or by mailing or delivering a check, money order, or cash with Form 8109, Federal Tax Deposit Coupon, to a financial institution that is an authorized depository for federal taxes. Some tax payers are required to deposit using EFTPS.

Payment with return - You may make a payment with Form 941 or Form 944 instead of depositing if one of the following applies:

* You report less than $2,500.00 tax liability for quarter on line 10 of Form 941 (or for the year on line 9 of Form 944), and you pay in full with a timely filed return. (However, if you are unsure that you will report less than $2,500.00, deposit under the appropriate rules so that you will not be subject to failure-to-deposit penalties.)

* You are a monthly schedule depositor and make a payment in accordance with the Accuracy of Deposits Rule discussed on page 21 of Circular E. This payment may be $2,500.00 or more.

Employers who have been notified to file Form 944 can pay their fourth quarter tax liability with a timely filed return if the fourth quarter tax liability is less than $2,500.00. Employers must have deposited any tax liability due for the first, second, and third quarters according to the deposit rules to avoid failure-to-deposit penalties for deposits during those quarters.

Hope this fully answers your question.

Category: Taxes

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