Federal Unemployment Tax Act Tax (FUTA Tax) – Exemptions and Special Rules

Posted in Employment Taxes

This is the sixth post in the Employment Tax Law series. This series is dedicated to presenting individuals, sole proprietorships, and small to large businesses with a basic understanding of employment taxes, including the risks and responsibilities associated with those taxes.

An employer must pay FUTA tax if the employer paid wages of $1,500 or more to employees in any calendar year; or employed one or more employees for at least some part of a day in any twenty or more different weeks in the current calendar year or the previous calendar year. The definition of “employees” includes all full-time, part-time, and temporary employees, but does not include any partners in a partnership.

Some payments to employees are exempt from FUTA tax. The most common of these are:

1. Some fringe benefits, including certain meals and lodging, contributions to accident or health plans and health savings accounts;

2. Group term life insurance;

3. Employer contributions to qualified retirement and pension Plans; and,

4. Dependent care.

See Internal Revenue Code Section 3306 for further information regarding exempt payments to employees for FUTA tax purposes.

Some employers that are exempt from filing Form 940 and paying FUTA tax include: Indian tribal governments, except when the tribe has not participated in the state unemployment system for the full year and is not in compliance with state unemployment laws, tax-exempt organizations, state and local governments.

If the company pays wages to employees who work in a private home, local college club, or local chapter of a college fraternity or sorority, generally, the employer should file Schedule H to Form 1040 rather than Form 940. If the employer pays other employees in addition to household employees, the employer can instead include the household employees on Form 940.

An agricultural employer is not required to file Form 940 and pay FUTA tax unless the employer paid cash wages of $20,000 or more to farmworkers during any calendar quarter in the current or previous calendar year; or, the employer employed ten or more farmworkers during some part of the day during any twenty or more different weeks in the current or previous calendar year.