Tax Article - IRS Increases the FUTA Deposit Threshold in 2005

The IRS has amended the rules for Federal Unemployment Tax Act (FUTA) deposits, raising the minimum threshold for FUTA tax deposits from $100 to $500. Under the new amendments, employers will be required to make a quarterly deposit of FUTA taxes only when their accumulated tax liability exceeds $500. The regulation is effective January 1, 2005.

Employer Paid

FUTA is a federal law, first enacted in 1939. All liable employers must pay the tax if, during the current or preceding calendar year, they meet the following criteria:

• Pay wages totaling at least $1,500 to employees in a calendar quarter, or

• Have at least one employee on any given day in each of 20 different calendar weeks (the weeks do not have to be consecutive and the single employee doesn’t necessarily have to be the same individual). 

Once an employer satisfies either of the tests, it becomes liable for FUTA for the entire calendar year and for the next calendar year as well. In addition, once that liability exceeds $100 for the year ($500 starting in 2005), it must start being paid in quarterly deposits. If it doesn’t not exceed the $100/$500 threshold amount, it may be paid with the annual return.

Computing the Tax

FUTA is imposed on employers at a single flat rate on the first $7,000 of wages paid to each employee. Once an employee’s wages for the calendar year exceed $7,000, the employer has no further FUTA liability for that employee for the year. 

The FUTA tax rate is a flat 6.2%. However, an employer can generally claim credits against its gross FUTA tax to reflect state unemployment taxes paid. If an employer paid all state unemployment taxes on time and before the due date of its FUTA tax return, it can claim a credit equal to 5.4% of its federally taxable wages. This effectively reduces the FUTA tax rate to 0.8% (maximum $56 per employee).

Reduced Burden

Under the current $100 threshold amount, most employers with two or more employees must at least make one quarterly federal tax deposit per year. Starting in 2005, employers with eight or less employees will avoid any quarterly payment ($56 x 8 = $448). 

"The IRS is committed to reducing burden on taxpayers whenever we can," Commissioner Mark Everson said. "The new rules will help cut paperwork for millions of small business." 

Please contact Feeley & Driscoll's Boston Accounting Firm by Email or call us at 1 (888) 875-9770.

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