A contractor has three employees with annual wages of $35,000, $48,000, and $65,000. What is the total FUTA tax liability for the year?
Correct Answer
C) $126
FUTA is calculated on the first $7,000 of each employee's wages at 0.6%. For all three employees: $7,000 × 3 employees × 0.006 = $126. The higher wages above $7,000 are not subject to FUTA.
Why This Is the Correct Answer
FUTA (Federal Unemployment Tax Act) tax is calculated at 0.6% on only the first $7,000 of each employee's annual wages. Since all three employees earn more than $7,000, the calculation is based on $7,000 for each employee. The total taxable wages are $21,000 ($7,000 × 3 employees), and 0.6% of $21,000 equals $126.
Why the Other Options Are Wrong
Option A: $252
$252 would result from incorrectly calculating 0.6% on $42,000 ($14,000 × 3), suggesting someone doubled the wage base to $14,000 per employee instead of using the correct $7,000 limit.
Option B: $888
$294 appears to result from using an incorrect tax rate or wage base calculation, possibly confusing FUTA with other payroll tax calculations or using outdated rates.
Memory Technique
Use 'Lucky 7-6': FUTA is Lucky because it caps at $7,000 per employee at only 0.6% - much lower than other payroll taxes
Reference Hint
Business and Finance chapter covering Federal Payroll Taxes, specifically FUTA calculations and wage base limitations
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