What is the FUTA tax?

FUTA (Federal Unemployment Tax Act) tax is a payroll or employment tax paid solely by the employer. While the FUTA tax is paid by the employer, it is based on each employee’s wages or salary. Generally, the FUTA tax ends up being 0.8% of the first $7,000 per year of each employee’s wages or salary. That means the employer’s maximum cost for FUTA per year per employee is $56 ($7,000 x 0.008). If an employee earns only $5,000 during a calendar year, the employer’s cost is $40 ($5,000 x 0.008).

Under double-entry accounting, the FUTA tax will result in 1) a liability, and 2) a cost that is immediately expensed or assigned as a product cost. (The cost of the FUTA tax on employees involved in manufacturing activities will be assigned to products. The cost of the FUTA tax on employees in the selling and administrative activities should be expensed with their salaries and wages as selling and administrative expense.)

For a painless way to learn about FUTA tax, you can view an excellent nine minute video from the Internal Revenue Service. Go to www.irs.gov. Select the tab Business. Next select Employment Taxes from the left panel. Then select What are Employment Taxes? At the bottom of that page you will find Online Classroom Lesson 9 - What you need to know about Federal Unemployment Taxes (FUTA) which is a link to the video.

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About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.