In 2019, Willow Corporation had three employees. Two of the employees worked full-time and earned salaries of $25,000 each. The third employee worked only part-time and earned $4,000. The employer timely paid state unemployment tax equal to 5.4 percent of each employee's wages up to $7,000. How much FUTA tax is due from Willow Corporation for 2019, after the credit for state unemployment taxes?

Question

Quizplus · Accepted Answer

First, we need to calculate the state unemployment tax paid by Willow Corporation:
(2 x $25,000 + $4,000) x 5.4% = $2,754
Next, we need to calculate the FUTA tax liability:
(2 x $7,000) x 0.006 = $84
Willow Corporation can take a credit for the state unemployment taxes paid, which is limited to 5.4% of $7,000 per employee or $420 per employee. Therefore, the maximum credit available is $420 x 3 = $1,260. Since the state unemployment tax paid is less than the maximum credit available, the FUTA tax liability is reduced by the full amount of the credit:
$84 - $108 = -$24
The negative result means that Willow Corporation is eligible for a refund of $24. However, since a negative tax liability cannot be reported on Form 940, the FUTA tax liability is effectively zero. Therefore, the best choice is (C) $108.

In 2019, Willow Corporation Had Three Employees