A contractor's annual payroll is $1,200,000. The FUTA rate is 6.0% on the first $7,000 of each employee's wages, and there are 25 employees. What is the maximum annual FUTA liability?
Correct Answer
D) $10,500
FUTA is calculated on the first $7,000 of each employee's wages. Maximum FUTA = 25 employees × $7,000 × 0.06 = $10,500. The total payroll amount is irrelevant since FUTA caps at $7,000 per employee.
Why This Is the Correct Answer
FUTA (Federal Unemployment Tax Act) has a wage base limit of $7,000 per employee per year, regardless of how much the employee actually earns. The calculation is straightforward: multiply the number of employees by the wage base limit, then by the tax rate. Since we have 25 employees, each subject to FUTA on only their first $7,000 in wages, the maximum liability is 25 × $7,000 × 6.0% = $10,500. The total annual payroll of $1,200,000 is a distractor and doesn't affect the calculation.
Why the Other Options Are Wrong
Option A: $15,750
This answer incorrectly applies the 6.0% rate to the entire $1,200,000 payroll ($1,200,000 × 0.06 = $72,000), ignoring the critical $7,000 per employee wage base limit that caps FUTA liability.
Option B: $72,000
This appears to be a calculation error, possibly using an incorrect rate or wage base. It doesn't follow the proper FUTA calculation formula of employees × wage base × rate.
Memory Technique
Remember 'FUTA 7-6': FUTA applies to the first $7,000 of wages at 6.0% rate - multiply by number of employees for maximum liability
Reference Hint
Look up Federal Unemployment Tax Act (FUTA) in the payroll taxes or employment law section of your reference materials
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