A company has 25 employees with a total annual payroll of $1,250,000. If the Federal Unemployment Tax Act (FUTA) rate is 6.0% on the first $7,000 of wages per employee, what is the maximum annual FUTA tax liability?
Correct Answer
A) $10,500
FUTA is calculated on the first $7,000 per employee. With 25 employees: 25 × $7,000 = $175,000 taxable wages. $175,000 × 6.0% = $10,500. Note that employers typically receive a credit reducing the effective rate to 0.6%.
Why This Is the Correct Answer
Option A is correct because FUTA tax is calculated on the first $7,000 of wages per employee annually. With 25 employees, the total taxable wages are 25 × $7,000 = $175,000. Applying the 6.0% FUTA rate: $175,000 × 0.06 = $10,500. This represents the maximum gross FUTA liability before any state unemployment tax credits are applied.
Why the Other Options Are Wrong
Option B: $8,400
Option B ($8,400) appears to calculate FUTA using an incorrect rate of 4.8% instead of 6.0%. This might result from confusing the net effective FUTA rate (0.6%) after state credits with an intermediate calculation, leading to an understated tax liability.
Option C: $75,000
Option C ($75,000) incorrectly applies the 6.0% FUTA rate to the entire annual payroll of $1,250,000 instead of limiting it to the first $7,000 per employee. This ignores the wage base cap that limits FUTA taxation.
Option D: $12,600
Option D ($12,600) overestimates the FUTA liability by using an incorrect calculation method. This might result from applying a higher rate or miscalculating the taxable wage base, leading to an inflated tax amount beyond the correct $10,500.
Memory Technique
Remember 'FUTA 7-6': FUTA applies to the first $7,000 per employee at 6.0% gross rate. Think '7 grand per hand, 6 percent command' - each employee's first $7,000 is taxed at 6%.
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