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Federal Unemployment Tax Act (FUTA)

The Federal Unemployment Tax Act (FUTA) is a United States federal law imposing a federal employer tax that is used to help fund state workforce agencies. Employers are required to report this tax by filing an annual tax form (940) with the Internal Revenue Service (IRS). Below are some of the most commonly asked questions about the Federal Unemployment Tax Act answered by the Experts.

When individuals own an S Corporation with each having a fifty percent share, can they pay each other as partners instead of employees?

In most cases an S Corporation owners would be required to pay themselves a salary that would need to be reported on a W-2. Since the IRS code specifically includes corporate officers within the definition of employees it would be hard to interpret it any other way. This link may help in this matter: http://www.irs.gov/newsroom/article/0,,id=200293,00.html.

If an individual hires their 15 year old child, and they do not want to be subject to Social Security withholdings; what are the proper channels to follow in order to test the limits of this?

If a child is under the age of 18 they are not subject to Social Security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child. Payments for the services of a child under the age of 21 who works for their parents in a trade or business are not subject to FUTA tax; however these payments are subject to income tax withholdings regardless of age. But the wages for the services of a child related or not are subject to income tax withholdings as well as Social Security, Medicare, and FUTA taxes if the child works for a corporation, a partnership (unless each partner is a parent of the child), or an estate, even if it is the estate of a deceased parent. This publication could be some help in regards to this matter: http://www.irs.gov/publications/p15/ar02.html#d0e905.

What are unemployment taxes and who pays it?

The Federal Unemployment Tax Act (FUTA) combines with state unemployment systems to provide unemployment compensation to workers who have lost their jobs. Most employers pay both a federal and a state unemployment tax, also the employer pays FUTA tax; these taxes are not withheld from the employee’s wages.

Do shareholders need to take a salary on an S-Corporation?

In many cases corporate officers are included within the IRS’s definition of an employee, and when corporate officers perform services for the corporation they receive or are entitled to receive payments, and then their compensation is generally considered wages. If a corporation distributes dividends without paying reasonable wages to its officers they would risk being targeted for an audit.

On the state of Texas’s IRS form 940, are the FUTA tax liabilities on line 16 paid to the Texas workforce commission?

Typically the in the state of Texas the quarterly unemployment taxes are sent into the Texas Workforce Commission on the state level. While the FUTA payment is paid annually to the IRS on the federal level. The state fund is used chiefly to pay claims, and the federal fund pays, among other things, for the operation of the field offices of state Employment Security system, and the Labor Department or Workforce Commission.

In certain cases an employer can be required to pay the IRS installments during the tax year. FUTA also covers a large share of the costs of unemployment insurance along with job service programs in every state. The information provided above about the Federal Unemployment Tax Act can be an important tool for some individuals, but can also open the door for many other questions that need to be answered by the Experts.

Ask a Tax Professional

Wallstreet Esq.
Wallstreet Esq., Tax Attorney
Category: General
Satisfied Customers: 572
Experience:  10 years experience
16356563
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Tax Professionals are online & ready to help you now

Wallstreet Esq.
Tax Attorney
Satisfied Customers: 572
10 years experience
Wendy Reed
Enrolled Agent
Satisfied Customers: 3053
15+ years tax preparation and tax advice.
Mark D
Enrolled Agent
Satisfied Customers: 985
MBA, EA, Specializing in Business and Individual Tax Returns and Issues

Recent FUTA Questions

  • My employer made contributions to my medical plan in 2014.

    My employer made contributions to my medical plan in 2014. They were not considered part of my salary. In 2015 there was a decision made by my employer to increase wages in the amount of the medical contribution in lieu of making a medical contribution. This was not discussed until we were required to participate in open enrollment and only 5 business days open enrollment closed. The wage increase was grossed up to offset the tax impact @ a 3.63% of wage but the increase itself will impact my tax bracket. I was making 115K base salary 2014 vs 118 K base salary 2015. Q: 1) is this a legal business practice 2) what can I do to minimize the impact to my 2015 tax filings with the IrS?

    Additional Info:  I live in PA and file as married at a higher single rate and already have $50.00 additional withheld from my taxes.  In 2014 by total gross income was 228,000.00

  • I have a S Corporation, in home business, but do not make very

    I have a S Corporation, in home business, but do not make very much and file jointly with my husband. Our account has told me not to pay myself so I have not. I think I should do this but not sure why he would advise not to.
  • Lev, I have an S-Corp that is 50%/50% owned with my wife. The S-Corp received $8500

    Lev,
    I have an S-Corp that is 50%/50% owned with my wife. The S-Corp received $8500 in income and paid out $10,000 in medical insurance premiums single policy covering both of us in addition to paying out $2600 in other expenses. I did not create W-2s as neither of us received salaries/wages. Can I deduct the full $10,000 in medical expenses against the $8500 income resulting in a net loss on the two K-1s?
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