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Federal unemployment tax
| How is the joint federal-state unemployment insurance program funded? Federal and state unemployment taxes fund the joint federal-state unemployment insurance program. Federal unemployment tax revenues fund accounts in the federal Unemployment Trust Fund (UTF) that pay for federal and state unemployment insurance program administration costs, the federal portion of extended benefits, and loans to State Unemployment Trust Funds. State unemployment tax revenues fund State Unemployment Trust Funds, which pay regular benefits and the state portion of extended benefits. Read more about unemployment taxes here. |
| Unemployment insurance |
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| • Terms and definitions • Court cases • Unemployment insurance programs in the states • Reform proposals related to unemployment insurance • Reform activity in the states related to unemployment insurance • Index of articles about unemployment insurance |
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Federal unemployment tax is a term that refers to the federal employment tax established by the Federal Unemployment Tax Act (FUTA). FUTA requires employers to pay federal taxes to support the joint federal-state unemployment insurance program. Employers also pay state unemployment taxes.
As of February 2025, the FUTA tax rate was 6% of the first $7,000 in wages paid to each employee annually.[1]
Background
The Federal Unemployment Tax Act (FUTA), passed in 1939, created a federal unemployment tax to fund the joint federal-state unemployment insurance program. The legality of FUTA was challenged and affirmed in Steward Machine Co. v. Collector of Internal Revenue (1937).
The federal unemployment tax, or FUTA tax, is collected by the Internal Revenue Service (IRS) and transferred to the Unemployment Trust Fund (UTF).
FUTA revenue funds the UTF's Employment Security Administration Account, which pays for federal and state unemployment insurance administration costs. The excess funds not needed for the Administration account fund the Extended Unemployment Compensation Account (EUCA) to pay the federal half of extended benefits. Excesses from the EUCA flow into the Federal Unemployment Account, which loans funds to State Trust Fund Accounts (STFA).[2]
STFAs are funded by state unemployment taxes and are used to pay regular unemployment benefits.
Tax amounts
While state tax amounts vary, the Federal Unemployment Tax Act (FUTA) tax is 6% of the federal unemployment tax wage base—the first $7,000 of an employee's wages—as of April 2025. Employers can receive an offset of up to 5.4% of their FUTA tax when they pay state unemployment taxes on time. An employer that receives the full 5.4% FUTA credit, therefore, pays 0.6% of the first $7,000 of an employee's wages, or $42, in FUTA tax per qualifying employee.[3][4]
FUTA tax credits are reduced for employers in states that have outstanding federal unemployment loans from the Unemployment Trust Fund’s Federal Unemployment Account on January 1 for at least two consecutive years. If states do not pay federal unemployment loans back by November 10 of the second consecutive year, FUTA tax credits are reduced by 0.3%. The reduction would limit the maximum FUTA tax credit to 5.1%, and employers would pay at least $63 in FUTA taxes per employee making $7,000 or more.[5]
Exempt wages
The following types of wages are exempt from FUTA taxes:[6][7]
- Wages paid by a 501(c)(3) nonprofit organization.
- Wages paid for services performed outside the United States.[8]
- Wages paid to a beneficiary or estate after the calendar year of a worker's death.
- Wages paid by a parent to a child under age 21.
- Wages paid by a child to a parent.
- Wages paid from spouse to spouse.
- Wages paid by foreign governments and international organizations.
- Wages paid by a state or local government (or another political subdivision).
- Wages paid by the United States federal government.
- Wages paid to newspaper carriers under age 18.
- Wages paid to a full-time student working fewer than 13 weeks during a calendar year for seasonal camps.
- Wages paid to statutory nonemployees (such as qualified real estate agents and direct sellers).
- Wages paid by a school to a student of the school.
- Wages paid by a hospital to interns.
Penalties for nonpayment
Failure to pay federal employment taxes can result in the assessment of fees, fines, and prison time. Late fees can range from 0.5% to 25% of the amount owed. Willful evasion of federal employment taxes is a felony punishable by five years in prison and fines of up to $250,000 for individuals, $500,000 for corporations, or both. Willful failure to file a tax return or provide information required by the Internal Revenue Service (IRS) is a misdemeanor punishable by up to one year in prison and fines up to $25,000 for individuals or $100,000 for corporations.[9][10][11][12]
See also
- Unemployment insurance
- Unemployment insurance fraud
- Unemployment insurance fraud recovery
- Unemployment taxes
- Unemployment Trust Fund
- Unemployment filings during the coronavirus (COVID-19) pandemic, 2020-2021
- State government plans to end federal unemployment benefits related to the coronavirus (COVID-19) pandemic, 2021
External links
Footnotes
- ↑ IRS, Who Must File Form 940? accessed February 22, 2024
- ↑ Washington State Legislature, "Washington State's Experience Rating System," accessed July 6, 2021
- ↑ Brookings, "How does unemployment insurance work? And how is it changing during the coronavirus pandemic?" July 20, 2020
- ↑ Employment Law Firms, "How Unemployment Works," accessed May 18, 2021
- ↑ Internal Revenue Service, "FUTA Credit Reduction," accessed August 4, 2022
- ↑ Internal Revenue Services, "Publication 15, (Circular E), Employer's Tax Guide For Use in 2021," accessed July 6, 2021
- ↑ Internal Revenue Services, "Publication 15-A, Employer's Supplemental Tax Guide For Use in 2021," accessed July 6, 2021
- ↑ Unless on or in connection with an American vessel or aircraft and either performed under contract made in U.S., or alien is employed on such vessel or aircraft when it touches U.S. port.
- ↑ IRS, "Interest and penalties for filing and paying taxes late," accessed February 22, 2023
- ↑ Esfandi Law Group, "FEDERAL TAX EVASION," accessed August 4, 2022
- ↑ IRS, IRS Rate Increase accessed August 4, 2022
- ↑ Tax Attorney, payroll accessed August 4, 2022
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