The Federal Unemployment Tax Act (FUTA) imposes a payroll tax on employers, based on the wages they pay to their employees. You don't withhold the FUTA tax from an employee's wages; the business itself must pay this tax.

Liability for tax. You must pay the FUTA tax if during the current or the preceding calendar year you meet either of the following tests:

• You pay wages totaling at least $1,500 to your employees in any calendar quarter, or
• You have at least one employee on any given day in each of 20 different calendar weeks (the 20 weeks need not be consecutive and the "one employee" need not be the same individual). For this purpose, a "calendar week" is a period of seven successive days beginning with Sunday and ending at the close of the following Saturday. However, short weeks at the beginning and end of a calendar year are counted as calendar weeks.

Once you meet either of the tests, you become liable for the FUTA tax for the entire calendar year and for the next calendar year as well. For example, if you first met the 1-in-20 test in December 2007, you would have been responsible for the tax with respect to the wages you paid during the entire 2007 calendar year as opposed to just the wages you paid after you met the test. You would also continue to be liable for the FUTA tax during the 2008 calendar year, even if you fail to meet both the wages-paid test and the 1-in-20 test during that year.

Computing the tax. The FUTA tax is imposed at a single flat rate on the first $7,000 of wages that you pay each employee. Once an employee's wages for the calendar year exceed $7,000, you have no further FUTA liability for that employee for the year.

For 2007 and 2008, the FUTA tax rate is 6.2 percent (6 percent plus a temporary surtax rate of 0.2 percent). However, you can generally claim credits against your gross FUTA tax to reflect the state unemployment taxes you pay. If you paid all your state unemployment taxes on time, and before the due date of your FUTA tax return, you'll be allowed to claim a credit equal to 5.4 percent of your federally taxable wages. This will effectively reduce the FUTA tax rate to 0.8 percent. The fact that your actual state tax rate is far below 5.4 percent doesn't matter — the federal credit is fixed at that rate.

Save Money If you're unable to pay your state taxes by the federal return due date, you can preserve your right to the maximum allowable credit by securing a filing extension for the federal return. If the extension is granted, you'll get the full credit if you pay the state taxes by the extended due date for the federal return.