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Federal Unemployment Tax Act (FUTA)

The Federal Unemployment Tax Act helps jobless people. Bankrate explains it.

What is the Federal Unemployment Tax Act (FUTA)?

The Federal Unemployment Tax Act (FUTA) imposes a federal payroll tax to help fund unemployment programs at the state level. Unlike other payroll taxes, FUTA tax is paid entirely by the employer and not withheld from employees’ pay. Funds from FUTA taxes are granted to individual states to fund unemployment benefits and job training initiatives.

Deeper definition

Employers must pay unemployment taxes for their workers. These taxes help fund unemployment assistance for workers who find themselves without a job. The employers cannot deduct the taxes from their workers’ pay; instead, they must pay the entirety of the tax.

As of March 2017, the tax rate under the FUTA is 6 percent. An employer must pay unemployment taxes if it pays $1,500 or more in wages in a single quarter, but only on the first $7,000 of each employee’s wages. Even if a company pays more than $1,500 in wages for only one quarter of the entire calendar year, the unemployment taxes are still required.

Many employers also have to pay state unemployment taxes in addition to taxes required by FUTA. If an employer also pays state unemployment taxes, it can take a credit of up to 5.4 percent of its taxable income. The employer then deducts this amount from its FUTA payment.

Check out Bankrate’s small business calculators to gauge your profitability and track your company’s financial health.

Federal Unemployment Tax Act example

Violet Heifer, an energy drink company, has two part-time employees who earn approximately $2,000 each quarter of the year. Violet Heifer will need to pay federal unemployment taxes for these employees for all the wages they earn for the first three quarters. However, in the fourth quarter, each of those employees will now have earned $8,000 that year, so Violet Heifer doesn’t have to pay FUTA taxes on the amount exceeding $7,000.

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