The FUTA tax is in the form of a payroll tax imposed upon (and paid by) employers. It is not withheld from employee wages. The amount that employers must pay is based on the amount of wages they pay to employees (excluding agricultural and domestic workers). Generally, employers are liable for FUTA taxes if one of the following applies:

• they have paid wages totaling at least $1,500 in any calendar quarter
• they have at least one employee on any given day in each of 20 calendar weeks (the 20 weeks need not be consecutive, and the “one employee” need not be the same person).

Once an employer is liable for FUTA under the above criteria, the employer must pay FUTA tax for the current calendar year as well as the next calendar year. The FUTA tax is currently at 6.2 percent, scheduled to decrease to 6.0 percent in 2008. The FUTA tax is imposed as a single flat rate on the first $7,000 of wages for each employee; no tax liability is incurred beyond the $7,000.

FUTA taxes are reported annually on Form 940, “Employer’s Annual Federal Unemployment Tax Return,” due every January 31 for the preceding year. On an annual basis, the Secretary of Labor reviews and certifies each state unemployment insurance program to the Secretary of the Treasury. The certification is necessary in order for employers who contribute to state unemployment funds to obtain FUTA tax credits. Employers who pay their state unemployment taxes on time are permitted to claim a credit equal to 5.4 percent of federally taxable wages, which effectively reduces the FUTA tax rate to 0.8 percent (6.2 minus 5.4).