Wave calculates Federal Unemployment Tax for you. This includes calculating the additional amount of Federal Unemployment Tax resulting from credit reduction states at the end of the year.
Wave automates Federal Unemployment Tax payments and filings for businesses enrolled in Wave Payroll’s automated tax service. Learn more about Payroll tax payments and filings with Wave.
Businesses not enrolled in Wave Payroll’s automated tax service or based in self-service states need to file and pay their taxes outside of Wave.
View your Federal Unemployment Tax liabilities
In the left navigation bar click Reports > Payroll Wage & Tax Report.
If you need to make any changes to your state or federal tax information, go to the left navigation menu and click Settings. Under the Payroll heading select Tax Profile.
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.
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.
Credit reduction calculations in Wave
Wave calculates the additional amount of federal unemployment tax owing on wages subject to state unemployment taxes in FUTA credit reduction states at the end of the year.
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.
If you pay employees who have not met the FUTA wage base ($7,000) at the time that Wave retroactively calculates the credit reduction adjustments, you’ll notice that Wave calculates FUTA at the updated rate for the remainder of the applicable tax year or until the employee’s pay exceeds the wage base. This means you’ll see Wave calculating the higher FUTA tax rate as required by the IRS.
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.
Learn about Wave’s Payroll accuracy guarantee.