One tax you don't hear much about is the federal unemployment tax, also called FUTA. FUTA is an acronym for the Federal Unemployment Tax Act, the law that establishes federal unemployment taxes. FUTA, along with state unemployment systems, pays for unemployment compensation to workers who have lost their jobs.
Most employers must pay both state and federal unemployment taxes. Employers alone are responsible for FUTA—they may not collect or deduct it from employees’ wages.
Technically, the FUTA tax rate is 6% on the first $7,000 of covered wages paid to each employee each year. However, in practice, most don't pay this amount. This is because employers receive a credit of up to 5.4% if they pay the applicable state unemployment tax in full and on time on all the same wages as are subject to FUTA tax. This means that the actual FUTA tax rate is usually .6%.
However, many states have experienced financial problems and have been unable to fund their state employment systems on their own. To make up for the shortfall, they have had to borrow money from the federal government. These loans are supposed to be repaid, but sometimes they're not. If a state defaults on its repayment of such a loan for at least 2 years, the normal 5.4% credit is reduced. This increases the employer's FUTA tax rate by .3% for each year in which the loan isn't repaid by the state involved.
Currently, the biggest deadbeat state is Indiana, which is three years behind in its loan repayments, resulting in a .9% credit reduction for FUTA payers in Indiana--in other words, Indiana employers must pay a 1.5% FUTA tax instead of .6%.
These states are two years behind in their loan repayments, resulting in an .6% credit reduction: Arkansas, California, Connecticut, Florida, Georgia, Kentucky, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Rhode Island, and Wisconsin. Employers in these states must pay 1.2% FUTA tax.
Arizona, Delaware, and Vermont are one year behind, resulting in a .3% credit reduction. Employers in these states must pay .9% FUTA tax.
You must pay FUTA taxes if either of the following is true:
- You pay $1,500 or more to employees during any calendar quarter—that is, any three-month period beginning with January, April, July, or October.
- You had one or more employees for at least some part of a day in any 20 or more different weeks during the year. The weeks don’t have to be consecutive, nor does it have to be the same employee each week.