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What is the FUTA Tax?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 03 December 2016
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In the United States, the FUTA Tax is a specific type of tax that is assessed by the Internal Revenue Service and is paid by employers on behalf of their employees. The tax was established by the Federal Unemployment Tax Act, and provides resources that are drawn upon when a former employee is eligible for unemployment benefits. The FUTA tax work hand in hand with unemployment agencies and systems at the state level to ensure that the benefits are distributed according to unemployment laws that prevail in the state in which the former employee resides.

The FUTA tax is somewhat different from other types of taxes associated with an employee. This particular type of taxation is not considered withholding, in that the amount assessed and forwarded by the employer is not deducted from the paychecks of the employees. Instead, the tax is paid by the employer as a benefit to the employee that may be drawn upon when and if the employee should ever qualify for the receipt of unemployment benefits.

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There are some qualifications that must be met in order for the employer to pay FUTA tax on a particular employee. Employers must pay the tax on any employees who are not classed as farm workers or home workers, and who were paid more than $1,500 US dollars in any quarter of the tax year. For farm workers, the employer must pay FUTA tax on each worker if employing at least ten workers for at least one day each week for 20 weeks. Home workers are subject to FUTA tax if the individual earns more than $1,000 USD in any given calendar quarter.

The amount of the FUTA tax is determined by applying a percentage to the total amount of wages paid to each eligible employee. That percentage is subject to change, based on current regulations put in place by the Internal Revenue Service (IRS). The tax is assessed until the employee reaches a specific amount of taxable income during the tax year.

As with the percentage used to calculate the amount of the taxes, the total amount of taxable wages that must be earned before the employer no longer has to calculate and remit the FUTA tax on the employee is subject to change, based on the current regulations put in place by the IRS. For this reason, employers should review federal tax codes at the beginning of each new tax year, and make sure to collect the FUTA tax in accordance with the most recent guidelines issued by the Internal Revenue Service.

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