How Unemployment Tax Works
The Federal Unemployment Tax Act (FUTA), with state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs. Most employers pay both a Federal and a state unemployment tax. A list of state unemployment tax agencies, including addresses and phone numbers, is available in Publication 926, Household Employer’s Tax Guide. Only the employer pays FUTA tax; it is not deducted from the employee’s wages. – IRS.gov
The Federal Unemployment Tax Act (or FUTA, 26 U.S.C. ch. 23) is a United States federal law that imposes a federal employer tax used to fund state workforce agencies. Employers report this tax by filing an annual Form 940 with the Internal Revenue Service. In some cases, the employer is required to pay the tax in installments during the tax year.
FUTA covers the costs of administering the unemployment insurance (UI) and job service programs in all states. In addition, FUTA pays one-half of the cost of extended unemployment benefits (during periods of high unemployment) and provides for a fund from which states may borrow, if necessary, to pay benefits.
For years through December 31, 2009, the FUTA imposes a 6.2% tax (before credits) on the first $7,000 of gross earnings of each worker per year. Once the worker’s earnings reach $7,000 during a given year, the employer no longer pays any Federal unemployment tax for that year with respect to that worker. Certain credits are allowed with respect to state unemployment taxes paid that may reduce the effective rate to 0.8%.
The following wages are exempt from Federal Unemployment Tax Act payments.
- Wages for services performed outside the United States.
- Wages paid to a deceased employee or a deceased employee’s estate in any year after the year of the employee’s death.
- Wages paid by a parent to a child under age 21, paid by a child to a parent, or paid by one spouse to the other spouse.
- Wages paid by a foreign government or international organization.
- Wages paid by a state or local government or by the United States federal government.
- Wages paid by a hospital to interns.
- Wages paid to newspaper carriers under age 18.
- Wages paid by a school to a student of the school.
- Wages paid by an organized camp to a student.
- Wages paid by non-profit organizations.
What This Means to You
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