A construction company has total annual payroll of $850,000. What is the maximum FUTA tax liability for the year, assuming the standard 0.6% rate applies?
Correct Answer
A) $4,200
FUTA tax applies only to the first $7,000 of each employee's annual wages. With proper calculation of eligible employees, the maximum would be approximately $4,200, assuming 100 employees each earning over $7,000 (100 × $7,000 × 0.6% = $4,200).
Why This Is the Correct Answer
FUTA tax is calculated at 0.6% on only the first $7,000 of each employee's annual wages, not the total payroll. The maximum FUTA liability occurs when you have the maximum number of employees each earning at least $7,000. With $850,000 total payroll, if we assume 100+ employees each earning over $7,000, the calculation becomes: number of employees × $7,000 × 0.6% = maximum liability of $4,200.
Why the Other Options Are Wrong
Option B: $2,940
$5,100 exceeds the realistic maximum given the payroll constraints and would require more employees than the total payroll could reasonably support at the $7,000 minimum threshold.
Option D: $5,100
$2,940 is too low and would represent only about 70 employees at the maximum FUTA wage base, which doesn't maximize the liability given the $850,000 total payroll.
Memory Technique
Remember 'FUTA 7-6': FUTA applies to first $7,000 per employee at 0.6% rate. The wage cap prevents unlimited liability regardless of total payroll size.
Reference Hint
Look up 'Federal Unemployment Tax Act (FUTA)' in the tax and payroll section of your contractor reference manual, specifically wage base limitations.
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