Overview
The Federal Unemployment Tax Act (FUTA), enacted in 1939, is a piece of federal legislation that establishes and mandates the collection of federal unemployment insurance taxes from employers. These taxes finance unemployment compensation programs for workers who have lost their jobs.
Key Points:
- Tax Responsibility: Employers are responsible for paying the FUTA tax.
- Tax Base and Rate: The tax is imposed on the first $7,000 in wages paid to each employee annually. The maximum tax rate is 6.2%, which can be reduced to 6% after June 30, 2011.
- State Credits: Employers can receive credits for the state unemployment taxes they pay, which can significantly reduce their FUTA tax liability.
Examples
- Employer A has three employees and pays each of them $10,000 annually. The FUTA tax is calculated on the first $7,000 paid to each employee.
- FUTA Tax Liability: \( 3 \text{ employees} \times 7,000 \times 6% = $1,260 \).
- State Unemployment Tax Credit: 5.4% credit (if applicable), thus:
- Net FUTA Liability: \( 1,260 - (7,000 \times 3 \times 0.054) = $126 \).
- Employer B pays $6,000 annually to each of two employees.
- FUTA Tax Liability: Each employee’s wage does not exceed the threshold.
- Total FUTA Tax: \( 6,000 \times 2 \times 6% = $720 \).
- If the state unemployment tax is fully credited: \( 720 - (6,000 \times 2 \times 0.054) = $0 \), as credit fully offsets FUTA.
Frequently Asked Questions
What is the purpose of the FUTA tax?
FUTA taxes fund unemployment compensation for workers who lose their jobs.
Who is responsible for paying FUTA taxes?
Employers are responsible for paying federal unemployment taxes under FUTA.
Can employers offset FUTA tax with state unemployment tax payments?
Yes, employers can receive a credit of up to 5.4% for state unemployment taxes paid, potentially reducing the FUTA tax to 0.6%.
Are employees required to pay FUTA taxes?
No, FUTA tax is solely the employer’s responsibility.
What happens if I overpay my FUTA taxes?
Employers can claim a refund or apply the overpayment to the next tax reporting period.
Related Terms
State Unemployment Tax (SUTA)
State Unemployment Tax, also known as State Unemployment Insurance (SUI) tax, is a tax imposed on employers by individual states to fund unemployment benefits for workers.
Federal Insurance Contributions Act (FICA)
A payroll tax that funds Social Security and Medicare benefits, shared by both employees and employers.
Payroll Tax
Taxes imposed on employers or employees, typically calculated as a percentage of the salaries that employers pay their staff.
Unemployment Compensation
A government program that provides temporary financial assistance to workers who become unemployed through no fault of their own.
Online References
Suggested Books
- Payroll Accounting 2021 by Bernard J. Bieg and Judith A. Toland
- Fundamentals of Payroll by American Payroll Association
- The Payroll Book: A Guide for Small Businesses and Startups by Charles Read
Fundamentals of Federal Unemployment Tax Act (FUTA): Employment Law Basics Quiz
Thank you for exploring the comprehensive details of the Federal Unemployment Tax Act (FUTA) and tackling our detailed quiz. Continue expanding your knowledge on critical employment taxes!
