Federal Unemployment Tax Act (FUTA)

Definition

The term Federal Unemployment Tax Act refers to legislation that allows the federal government to collect revenues from businesses to pay unemployed workers.  Funds collected under the Federal Unemployment Tax Act, or FUTA, are collected from employers and are then allocated to state governments to pay unemployment benefits to eligible individuals.

Explanation

The Federal Unemployment Tax Act is a law that allows the federal government to collect money from businesses for the purpose of funding state-level unemployment insurance (UI) benefits.  Only employers are required to pay FUTA taxes, employees do not pay into this fund.  Individual states have the right to collect additional unemployment taxes from both employers as well as employees.

Along with state-level administrators, the revenues collected through FUTA are used to compensate workers that lose their jobs.  The current (2014) FUTA tax rate is 6.0% of the first $7,000 in annual wages paid to each employee.  Employers that pay state unemployment insurance are provided a credit of 5.4% towards their FUTA obligation.  This mechanism lowers the effective FUTA rate to 6.0% - 5.4%, or 0.6%.

If state-level UI funds are depleted, they may draw from a federal loan account.  These loans must be repaid in less than two years or the 5.4% credit is reduced.  During periods of high unemployment, funds from FUTA can also be used to pay up to 50% of the costs associated with an extension of unemployment benefits.

Related Terms

flat tax, progressive tax, expatriation tax, excise tax, ad valorem tax, tax treaty, Gas Guzzler Tax, franchise tax, household employer's withholding tax, luxury tax, non-resident entertainers' tax