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All About the Federal Unemployment Tax (FUTA)

Rachel Cautero
Here's everything you need to know about the FUTA tax.

If you qualify for unemployment benefits, you’ll likely receive them via the Department of Labor’s Unemployment Insurance (UI) programs. But someone has to pay for the benefits that unemployed workers receive. Enter the Federal Unemployment Tax Act, or FUTA tax. Here’s how it works and what you pay for it.

The Federal Unemployment Tax Act: The Basics

Here's everything you need to know about the FUTA tax.

The Federal Unemployment Tax Act is a means of collecting funds for unemployment payments for unemployed workers. Basically, it’s a means of accumulating funds to pay unemployment benefits to laid-off workers.

According to FUTA, employers must pay an unemployment tax of 6% on the first $7,000 of employee wages. These taxes help fund the U.S. Department of Labor’s Unemployment Insurance (UI) programs. An employees wages dictate the amount of FUTA taxes an employer pays. It’s also important to understand that the tax enacted by the Federal Unemployment Tax Act is paid by the employer, not the employee. FUTA does not come out of an employee’s wages.

More specifically, employers must pay FUTA taxes of 6% on the first $7,000 in income for each employee. Employers also are eligible for a credit against the FUTA tax of up to 5.4%. Employers must file their FUTA taxes annually come tax time and then report those taxes to the IRS via Form 940, the Employer’s Annual Federal Unemployment (FUTA) Tax Return.

Who It Benefits

In short, anyone who has received unemployment benefits has indirectly benefited from FUTA and its resulting taxes. And how many workers is that? About 23.1% of jobless workers received unemployment benefits from state IU programs as of December 2014, according to information from the Economic Policy Institute.

However, to quality for unemployment insurance, workers must have been laid off by no fault of their own. Also, they must meet their state’s eligibility requirements. The IRS also says that IU benefits are intended as temporary financial assistance to unemployed workers. Meanwhile, eligibility for receiving said benefits are decided by state unemployment laws (though these laws must fall under federal guidelines).

What’s Exempt from FUTA Tax

Here's everything you need to know about the FUTA tax.

But some wages are exempt from the FUTA tax. Exempt wages include those paid to a deceased employee’s spouse or by a parent to a child under age 21. Also wages for services performed outside the United States or those paid to a foreign government or other international organization, are exempt. Meanwhile, wages paid by non-profit organizations or those paid to hospital interns don’t qualify. Neither do wages a school pays to a student of that school. If wages are paid by a seasonal camp to part-time student employees (i.e. those who worked less than 13 weeks during the calendar year), they dodge FUTA as well.

Added benefits are wages that don’t help determine the FUTA tax. For example, those can include contributions to employee health plans, moving expense reimbursements, and some life insurance benefits. Also, employer contributions to employee retirement accounts are exempt. It’s also important to note that employee wages beyond $7,000 are not subject to the FUTA tax.

The IRS usually requires employers to pay FUTA taxes quarterly, though there are some exceptions, For example, businesses that owe less than $500 in FUTA taxes are exempt.  Small business are most likely to benefit from that FUTA loophole.

The Bottom Line

The Federal Unemployment Tax Act (FUTA), dictates that employers must pay an unemployment tax of 6% on the first $7,000 of employee wages. This helps fund the U.S. Department of Labor’s Unemployment Insurance (UI) programs.

Employers bear responsibility for FUTA taxes, not the employee. FUTA does not come out of an employee’s wages. As dictated by FUTA, employers must pay taxes of 6% on the first $7,000 in income for each employee. Employers also are eligible for a credit against the FUTA tax of up to 5.4%.

Some wages are exempt from the FUTA tax. These include those paid to a deceased employee’s spouse or by a parent to a child under age 21, wages for services performed outside the United States, contributions to employee health plans, moving expense reimbursements, some life insurance benefits, and employer contributions to employee retirement accounts.

Financial Tips

  • If you aren’t sure how unemployment or FUTA will affect your finances, consider consulting a financial advisor. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
  • Need a little help figuring things out before tax season? Unsure what your income taxes are or what your property taxes look like? SmartAsset’s tax guide can help you with some of the initial calculations before you dive into this year’s return.
  • Unemployment may be as much about where you live as it is about what you do. Other cities and states may hold opportunities that your current home doesn’t. SmartAsset found the most livable cities in the U.S. and can show you where the costs are low and the jobs are plentiful.

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