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The Federal Unemployment Tax Act (or FUTA, ) is a
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

United States
federal law Federal law is the body of law Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by its envir ...
that imposes a federal employer tax used to help fund state workforce agencies. Employers report this tax by filing an annual Form 940 with the
Internal Revenue Service The Internal Revenue Service (IRS) is the revenue service A revenue service, revenue agency or taxation authority is a government agency responsible for the intake of government revenue, including taxes and sometimes non-tax revenue. Depe ...
. In some cases, the employer is required to pay the tax in installments during the tax year. FUTA covers a federal share of the costs of administering the
unemployment insurance Unemployment benefits, also called unemployment insurance, unemployment payment, unemployment compensation, or simply unemployment, are payments made by authorized bodies to unemployed Unemployment, according to the OECD (Organisation for Ec ...
(UI) and job service programs in every state. In addition, FUTA pays one-half of the cost of extended
unemployment benefits Unemployment benefits, also called unemployment insurance, unemployment payment, unemployment compensation, or simply unemployment, are payments made by authorized bodies to unemployed Unemployment, according to the OECD The Organisatio ...
(during periods of high unemployment) and provides for a fund from which states may borrow, if necessary, to pay benefits.


Amount of tax

Until June 30, 2011, the Federal Unemployment Tax Act imposed a tax of 6.2%, which was composed of a permanent rate of 6.0% and a temporary rate of 0.2%, which was passed by Congress in 1976. The temporary rate was extended many times, but it expired on June 30, 2011. Consequently, for the years until 2010 and the first six months of 2011, the FUTA imposed a 6.2% tax (before credits) on the first $7,000 of gross earnings of each worker per year. Once the worker's earnings reach $7,000 during a given year, the employer no longer pays any FUTA for that year with respect to that worker. Certain credits are allowed with respect to state unemployment taxes paid that may reduce the effective FUTA rate to 0.8%. Effective July 1, 2011, the rate decreased to 6.0%. That rate may be reduced by an amount up to 5.4% through credits for contributions to state unemployment programs under sections 3302(a) and 3302(b), resulting in a minimum effective rate on and after July 1, 2011 of 0.6% (6.0–5.4%).


Credit reduction

The credit against the federal tax may be reduced if the state has an outstanding advance (commonly called a "
loan In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money avai ...
"). When states lack the funds to pay unemployment insurance, they may obtain loans from the federal government. To ensure that these loans are repaid and in accordance with Title XII of the
Social Security Act The Social Security Act of 1935 is a law enacted by the 74th United States Congress and signed into law by US President The president of the United States (POTUS) is the head of state and head of government of the United States of Ameri ...

Social Security Act
, the federal government is entitled to recover them by reducing the FUTA credit it gives to employers, which is the equivalent of an overall increase in the FUTA tax. When a state has an outstanding loan balance on January 1 for two consecutive years, and the full amount of the loan is not repaid by November 10 of the second year, the FUTA credit will be reduced until the loan is repaid. That process is commonly called FUTA credit reduction and was designed as an involuntary repayment mechanism. The reduction schedule is 0.3% for the first year and an additional 0.3% for each succeeding year until the loan is repaid. From the third year onward, there may be additional reduction(s) in the FUTA tax credit (commonly dubbed "add-ons"). For example, for taxable years 2012 and 2013, the
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had a 2.7% "add-on" when its tax rate on total wages was below a national minimum. For taxable year 2014,
Connecticut Connecticut () is the southernmost state in the New England region of the United States. As of the 2010 United States census, 2010 Census, it has the highest per-capita income, second-highest level of List of U.S. states and territories by H ...
had a "BCR add-on" when its tax rate on the taxable portion of covered wages in the previous calendar year was less than the 5-year benefit–cost ratio applicable for the taxable year. Based on their loan status on November 10, 2016,
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California
and the Virgin Islands are the only two jurisdictions that received reduced FUTA credit for taxable year 2016. Employers in these states will pay extra FUTA taxes that are effective retroactively to January 1, 2016. Below is a list of FUTA state credit reductions for taxable year 2009 through 2016, and their respective reduction amounts (in %):


FUTA and general taxes comparison table

The major taxes that employers have to pay include FUTA, SUTA,
Sales Tax A sales tax is a tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelate ...
, Medicare, and
Social Security Welfare (or commonly, social welfare) is a type of government support intended to ensure that members of a society can meet basic human needs Maslow's hierarchy of needs is an idea in psychology Psychology is the science of mind and ...
. Businesses also pay many other faxes, such as state franchise taxes, business inventory taxes, property taxes, state income tax, federal income tax, etc.


Exempt wages

The following wages are exempt from Federal Unemployment Tax Act payments: # Wages for services performed outside the United States. # Wages paid to a deceased employee or a deceased employee's estate in any year after the year of the employee's death. # Wages paid by a parent to a child under age 21, paid by a child to a parent, or paid by one spouse to the other spouse. # Wages paid by a foreign government or
international organization An international organization (also known as an international institution or intergovernmental organization) is a stable set of norms and rules meant to govern the behavior of states and other actors in the international system. Organizations ...
. # Wages paid by a state or local government or by the United States federal government. # Wages paid by a hospital to interns. # Wages paid to newspaper carriers under age 18. # Wages paid by a school to a student of the school. # Wages paid by an organized seasonal camp to a full-time student who worked fewer than 13 calendar weeks during the calendar year. # Wages paid by
501(c)(3) A 501(c)(3) organization is a corporation, trust, unincorporated association, or other type of organization exempt from federal income tax under section 501(c)(3) of Title 26 of the United States Code. It is one of the 29 types of 501(c) organizat ...
nonprofit organizations.


Internet culture

In acronym form, the Federal Unemployment Tax Act is sometimes the subject of humour among online communities. This is due to the fact that "futa" is also a shortening of the term "
futanari is the Japanese word for hermaphrodite, hermaphroditism, which is also used in a broader sense for androgyny. Krauss, Friedrich Salomo et al. ''Japanisches Geschlechtsleben: Abhandlungen und Erhebungen über das Geschlechtsleben des japanischen ...

futanari
", which usually refers to a
pornographic Pornography (often shortened to porn) is the portrayal of sexual subject matter for the exclusive purpose of sexual arousal Sexual arousal (also sexual excitement) is typically the arousal Arousal is the physiological and psychologic ...
genre of
anime and manga Collectively, anime and manga refer to a form of mass media Mass media refers to a diverse array of media Media may refer to: Physical means Communication * Media (communication), tools used to deliver information or data ** Adve ...
.


See also

*
SurtaxA surtax may be a tax levied upon a tax. United Kingdom In 1929, the supertax (which had been introduced in the Finance Act 1909 at the rate of 6 old pence The pre-decimal penny (1d) was a coin A coin is a small, flat, (usually, depending on t ...
*
Unemployment Trust FundThe Unemployment Trust Fund (UTF) is composed of 59 accounts in the United States Treasury The Department of the Treasury (USDT) is the Treasury, national treasury of the federal government of the United States where it serves as an United States ...


References

{{Reflist


External links


Printable FUTA form 940 from IRS.gov

Information on unemployment taxes from DOL.gov

Three Tax Law Changes Accounting Pros Need to Know in 2015
Unemployment Tax Act Unemployment in the United States 83rd United States Congress United States federal legislation articles without infoboxes Withholding taxes