Definition: The Federal Unemployment Tax Act imposes a tax on employers that pay wages to employees. These taxes are often called FUTA taxes. Employers are required to pay a percentage, 6.2% as of 2011, of their employees’ wages. This tax is used to fund the federal unemployment insurance programs. The unemployment insurance programs help fund state unemployment programs and provide monthly payments to workers who lost their jobs. These payments to individuals are called unemployment compensation.
What Does FUTA Taxes Mean?
FUTA taxes are calculated on the first $7,000 of employee wages. If an employee earns more than $7,000, no FUTA tax is collected on the additional wages. Take an employee who makes $8,000 a year for example. The employer would have to pay a 6.2% FUTA tax on the $7,000 of the wages. The remaining $1,000 of wages is not subject to FUTA taxes. Employee wage amounts and FUTA tax limits are reconciled on the employer’s quarterly filing forms. Employers are required to file Form 940 and remit FUTA taxes to the federal government quarterly.
FUTA only makes up part of the employer’s overall payroll taxes. FICA taxes or social security and medicare taxes make up the rest of the employer’s federal payroll taxes. In most cases employers also have to pay state unemployment taxes or SUTA taxes. FICA, FUTA, and SUTA make up the overall payroll tax burden on most employers.
Some wages are exempt from FUTA taxes including, payments made by the federal government, payments made from parents to children under the age of 21, and wages paid by a hospital to an intern.