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Federal Unemployment Tax Act (1939)

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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.

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The Federal Unemployment Tax Act of 1939 (FUTA), established under the Social Security Amendments of 1939 (Public Law 76-379), updated the federal unemployment tax established under the Social Security Act of 1935 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 FUTA tax is collected by the Internal Revenue Service (IRS) and transferred to the Unemployment Trust Fund (UTF). Employers also pay state unemployment taxes in addition to FUTA taxes.[1][2]

President Franklin D. Roosevelt signed the Social Security Amendments of 1939, including FUTA, into law on August 11, 1939.[3]

Background

See also: Unemployment insurance

The joint federal-state unemployment insurance program was established in 1935 through the Social Security Act (SSA). Due to concern that the U.S. Supreme Court would find a national unemployment insurance program unconstitutional, Congress designed a federal payroll tax mechanism that incentivized states to set up their own unemployment insurance programs under the direction of broad federal guidelines. Under the 1935 system, the federal government taxed the total annual wages of covered workers, phasing the tax in at 0.1% in 1936, 0.2% in 1937, and 0.3% in 1938 for employers in states with compliant unemployment insurance programs that paid taxes on time. Employers in states that did not have compliant unemployment insurance programs and employers that did not pay their state unemployment taxes on time had to pay a higher tax rate.[4][5][6]

Under the Social Security Amendments of 1939, FUTA established a taxable wage base of $3,000, meaning only the first $3,000 of covered workers earnings were taxed. The FUTA maintained the 0.3% net tax rate on the taxable wage base for employers who paid state unemployment taxes in compliant states. Employers who paid at the 0.3% net FUTA tax rate had to pay a maximum federal unemployment tax of $9 annually per covered employee.[6]

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.[7][8]

As of January 2022, the FUTA tax rate was 6% of the first $7,000 in wages paid to each employee annually.

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.[9]

Timeline of FUTA tax amount changes

This section outlines some significant changes to FUTA taxable wage bases and net tax rates. Net tax rate is a term that refers to the FUTA tax rate minus the maximum state tax credit. For example, as of January 2022, the FUTA tax rate was 6.0%, but employers could receive an offset of up to 5.4% of their FUTA tax when they pay state unemployment taxes on time and their state does not have overdue loans from the U.S. Treasury.[10]

  • 1983: The net tax rate increased from 0.5% to 0.6%. The taxable wage base also increased from $6,000 to $7,000. Employers who received the full FUTA tax offset had to pay $42 in annual taxes per employee who made $7,000 or more per year.
  • 1978: The taxable wage base increased from $4,200 to $6,000. Employers who received the full FUTA tax offset had to pay $30 in annual taxes per employee who made $6,000 or more per year.
  • 1972: The taxable wage base increased for the first time since the passage of FUTA from $3,000 to $4,200. Employers who received the full FUTA tax offset had to pay $21 in annual taxes per employee who made $4,200 or more per year.
  • 1970: The net tax rate increased from 0.4% to 0.5%. Employers who received the full FUTA tax offset had to pay $15 in annual taxes per employee who made $3,000 or more per year.
  • 1965: The net tax rate increased for the first time since the passage of FUTA from 0.3% to 0.4%. Employers who received the full FUTA tax offset had to pay $12 in annual taxes per employee who made $3,000 or more per year.
  • 1939: The passage of FUTA established a $3,000 wage base and maintained the 0.3% net tax rate. Employers who received the full FUTA tax offset had to pay $9 in annual taxes per employee who made $3,000 or more per year.

Exempt wages

The following types of wages are exempt from FUTA taxes:[11][12]

  • Wages paid by a 501(c)(3) nonprofit organization.
  • Wages paid for services performed outside the United States.[13]
  • 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 2% 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.[14][15][16]

See also

External links

Footnotes

  1. ↑ U.S. House of Representatives, "Section 7. Unemployment Compensation," accessed January 3, 2022
  2. ↑ Social Security Administration, "PUBLIC-No. 379-76TH CONGRESS," accessed January 3, 2022
  3. ↑ Social Security Administration, "13. Presidential Statement on Signing Some Amendments to the Social Security Act --August 11, 1939," accessed January 3, 2022
  4. ↑ The Wall Street Journal, "How Does Unemployment Work?" February 22, 2021
  5. ↑ Social Security Administration, "Unemployment Insurance, Then and Now 1935-1985," accessed May 19, 2021
  6. ↑ 6.0 6.1 Congressional Research Service, "Unemployment Compensation: The Fundamentals of the Federal Unemployment Tax (FUTA)," accessed January 4, 2022
  7. ↑ Brookings, "How does unemployment insurance work? And how is it changing during the coronavirus pandemic?" July 20, 2020
  8. ↑ Employment Law Firms, "How Unemployment Works," accessed May 18, 2021
  9. ↑ Internal Revenue Service, "FUTA Credit Reduction," accessed July 6, 2021
  10. ↑ Cite error: Invalid <ref> tag; no text was provided for refs named CRS
  11. ↑ Internal Revenue Services, "Publication 15, (Circular E), Employer's Tax Guide For Use in 2021," accessed July 6, 2021
  12. ↑ Internal Revenue Services, "Publication 15-A, Employer's Supplemental Tax Guide For Use in 2021," accessed July 6, 2021
  13. ↑ 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.
  14. ↑ FindLaw, "Penalties for Violating Federal Employment Tax Rules," accessed July 6, 2021
  15. ↑ Esfandi Law Group, "FEDERAL TAX EVASION," accessed July 6, 2021
  16. ↑ Freeman Law, "Tax Crimes: Section 7203 and Willful Failures to File a Tax Return," accessed July 6, 2021
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