What is the Federal Unemployment Tax Act (FUTA)?

The Federal Unemployment Tax Act was passed in 1939, and it set up trust funds for the purpose of providing unemployment insurance.

Businesses, not individuals, are taxed to provide funds for the program. There are 53 state funds (including D.C., Puerto Rico, and the Virgin Islands), 4 federal accounts, and 2 associated with railroad retirement. The Federal Unemployment Tax helps states fund their own unemployment programs.

The tax is assessed from businesses and not individuals. The tax is equal to about 6% of employee compensation up to $7,000.

Oddly, employers in most states by default receive a credit from the Federal Government that has the effect of reducing the FUTA, but this credit is taken away if the state falls short with unemployment income funding — by taking the credit away, the employer is taxed more and the Federal government is able to give that money to the state to help fund its unemployment benefit.

The Federal government just serves as a conduit in such cases. There are Federal trust funds which hold assets to pay unemployment benefits as well.

Individuals may be entitled to collect unemployment benefits if they lost their job at no fault of their own, but not if they quit or were fired. Most employers have to pay the FUTA tax if they have even one employee.

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