A Guide To Understanding FUTA And Its Role In Unemployment Insurance

By Martin B

You may be unaware of this, but employers are mandated by the Federal Unemployment Tax Act (FUTA) to pay a tax on a fraction of their employees’ salaries to finance unemployment benefits for employees who have become jobless, according to federal law.

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The money collected from FUTA taxes is used to finance state unemployment insurance programs that provide temporary financial assistance to eligible individuals who are unemployed through no fault of their own.

Under FUTA, employers are required to pay six percent on the first $7,000 their employee’s make in a year. This means that the maximum amount an employer would be required to pay for each employee is $420 per year.

However, many states also have their own unemployment taxes, which are used to fund state-level unemployment insurance programs. Employers are required to pay both FUTA and state unemployment taxes, which can vary depending on the state.

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Employers must report their FUTA taxes on their annual federal tax return, which is filed using Form 940. If an employer has paid all their SUTA on time, they could be suitable for a credit of 5.4% on their FUTA taxes.

In addition to funding state unemployment programs, FUTA taxes are also used to provide grants to states for improving their unemployment programs, as well as for various other federal workforce development and training initiatives.

Overall, FUTA plays a critical role in funding unemployment insurance programs, which provide financial assistance to millions of Americans who have lost their jobs due to no fault of their own.