Federal unemployment tax is an employer tax payable to the IRS. It is mandated by the Federal Unemployment Tax Act and is often referred to as FUTA. Federal unemployment tax is reported on IRS Form 940: Employer's Annual Federal Unemployment (FUTA) Tax Return.
Federal unemployment tax in Wave
Credit reduction states explained
Credit reduction calculations in Wave
Federal unemployment tax in Wave
Wave automatically calculates federal unemployment taxes. This includes calculating the additional amount of federal unemployment tax resulting from credit reduction states at the end of the year.
Wave automatically completes federal unemployment tax payments and filings for businesses active on Wave’s payroll feature. Learn more about Payroll tax payments and filings with Wave.
To view your federal unemployment taxes in Wave, on the left-side menu, click Reports > Payroll Reports.
To learn more about FUTA, visit the IRS website.
Credit reduction states explained
The IRS explains that “A state is a credit reduction state if it has taken loans from the federal government to meet its state unemployment benefits liabilities and has not repaid the loans within the allowable time frame.”
When this happens, employers paying wages subject to unemployment insurance tax in credit reduction states will owe more FUTA tax, because the IRS reduces the FUTA credit amount until the loan is repaid.
Learn about FUTA Credit Reduction.
Credit reduction calculations in Wave
At the end of the year, Wave calculates the additional amount of federal unemployment tax owing on wages subject to state unemployment taxes in FUTA credit reduction states.
If your employee wages are subject to the increased FUTA rate, the updated liability will be added to your Q4 payroll wage and tax report. Wave updates FUTA calculations to reflect credit reduction in November and December. This is because the US Department of Labor releases the final list of credit reduction states every year on November 10.
For up-to-date information on FUTA credit reduction states and timelines, see US Department of Labor’s website.
Like other FUTA payments, the additional FUTA tax is due to the IRS and is reportable on the Form 940 and its Schedule A.
If you’re enrolled in Payroll tax payments and filings with Wave, we schedule these payments and complete the filings for you. The additional federal unemployment amounts due will be scheduled for withdrawal and payments submitted with Form 940.