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Federal Unemployment Tax Act

What is the Federal Unemployment Tax Act (FUTA)?

Federal Unemployment Tax Act (FUTA) is a federal insurance program that pays unemployment benefits to people who are being either terminated or laid off without any of their personal reason or fault. FUTA considered as Employment Tax or Employer Payroll Tax means it is not being deducted from the employee’s wages. Employers are responsible for 6% of the first $7,000 paid to the employee each year.

Who is exempted from Federal Unemployment Tax Act (FUTA)?

If the employer hires an independent contractor or a freelancer for a specific job\work, the employer is not responsible to pay any Employer Payroll Tax as they are liable to pay their own federal unemployment tax or any other taxes.

History of Federal Unemployment Tax Act FUTA

During 1929 and 1933 the world economy collapsed. It has been noted that 25% of the United States faced unemployment. This economic collapse affected the civilians of the United States, United Kingdom, and Germany. After the crisis and social hunger faced by employees, in 1939 a federal law was passed to raise revenue to administer employment insurance in all states of the US.

Related: Form 940, State Unemployment Tax Act (SUTA), Payroll Tax Rates