When a person performs services for you and you are considered an "employer," then you may be subject to the federal unemployment tax under the Federal Unemployment Tax Act (FUTA), one of the three employment taxes that an employer would need to pay. (Other two being Federal Income Tax Withheld and Social Security Tax). Employers who fail to pay this tax may be subject to interests and penalties.

Who Is An "Employer" For Purposes Of FUTA?

Generally, a person is considered an "employer" for FUTA if he/she meets either of the following two tests:

  • Employs at least one individual in covered employment for some part of each of 20 days during the current or preceding year, with each day being in a different calendar week; or
  • Pays wages of $1,500 or more during any calendar quarter in the current or preceding year.

An example of meeting the first test is as follows:

J employs A for one day per week for 2 weeks in January, B for one day per week for 16 weeks in June, and C for one day per week for 2 weeks in August. J has satisfied the "1 " in 20' test.

However, special rules apply for "employers" of agricultural workers and domestic workers (e.g. a maid).

Which Types Of Taxpayers Are Subject To FUTA?

Almost all types of taxpayers, such as an individual, a partnership, a corporation, a s-corporation, a limited liability company, a trust, and an estate, need to pay federal unemployment tax if it applies. The only exception is that tax-exempt organizations are not subject to FUTA.

What Is The Special Rule For Employers Of Agricultural Workers?

An employer of agricultural workers is subject to FUTA when he/she:

  • Employs at least 10 agricultural workers for some part of each of 20 days during the current or preceding year, with each day being in a different calendar week; or
  • Pays wages of $20,000 or more during any calendar quarter in the current or preceding year.

What Is The Special Rule For Employers Of Domestic Workers?

An employer of domestic workers is only subject to FUTA if he/she:

  • Pays cash wages of $1,000 or more during any calendar quarter in the current or preceding year.

Note that wages must be in cash, or it will not count.

How Much Is the Federal Unemployment Tax?

The federal unemployment tax for 2005 is 6.3% on the lesser of:

  • Wages paid to the employee; or
  • $7,000.

Employers are entitled to a credit for state unemployment fund contributions. Usually, the net federal unemployment tax rate after applying such credit is 0.8% for 2005.

Do I Need an Attorney to Help Me with My Tax Problems?

Tax laws are complex and ever-changing. Although there are various tax preparation softwares on the market that may help you with your tax problems, they cannot provide the same level of service that an experienced and knowledgeable business attorney can. If you are unsure about your payroll taxes or you need someone to represent you before the IRS, a tax attorney can help you.