The Federal Unemployment Tax Act (or FUTA, I.R.C. ch. 23) is a United States federal law that imposes a federal employer tax used to help fund state workforce agencies. Employers report this tax by filing Internal Revenue Service Form 940 annually. In some cases, employers are required to pay the tax in installments during the tax year.
FUTA covers a federal share of unemployment insurance (UI) and job service program administration costs in every state. In addition, FUTA pays one-half the cost of extended unemployment benefits during periods of high unemployment. It also provides a fund that states can borrow from when necessary to pay benefits.
Legal basis
editThe legality of FUTA has been affirmed in the 1937 Supreme Court case Steward Machine Co. v. Davis.
Amount of tax
editUntil June 30, 2011, the Federal Unemployment Tax Act imposed a tax of 6.2%, which was composed of a permanent rate of 6.0% and a temporary rate of 0.2%, which was passed by Congress in 1976. The temporary rate was extended many times, but it expired on June 30, 2011.
Consequently, for the years until 2010 and the first six months of 2011, the FUTA imposed a 6.2% tax (before credits) on the first $7,000 of gross earnings of each worker per year.[1] Once the worker's earnings reach $7,000 during a given year, the employer no longer pays any FUTA for that year with respect to that worker. Certain credits are allowed with respect to state unemployment taxes paid that may reduce the effective FUTA rate to 0.8%.
Effective July 1, 2011, the rate decreased to 6.0%. That rate may be reduced by an amount up to 5.4% through credits for contributions to state unemployment programs under sections 3302(a) and 3302(b), resulting in a minimum effective rate on and after July 1, 2011 of 0.6% (6.0–5.4%).[2][3]
Credit reduction
editThe credit against the federal tax may be reduced if the state has an outstanding advance (commonly called a "loan"). When states lack the funds to pay unemployment insurance, they may obtain loans from the federal government. To ensure that these loans are repaid and in accordance with Title XII of the Social Security Act, the federal government is entitled to recover them by reducing the FUTA credit it gives to employers, which is the equivalent of an overall increase in the FUTA tax. When a state has an outstanding loan balance on January 1 for two consecutive years, and the full amount of the loan is not repaid by November 10 of the second year, the FUTA credit will be reduced until the loan is repaid. That process is commonly called FUTA credit reduction and was designed as an involuntary repayment mechanism. The reduction schedule is 0.3% for the first year and an additional 0.3% for each succeeding year until the loan is repaid. From the third year onward, there may be additional reduction(s) in the FUTA tax credit (commonly dubbed "add-ons"). For example, for taxable years 2012 and 2013, the Virgin Islands had a 2.7% "add-on" when its tax rate on total wages was below a national minimum. For taxable year 2014, Connecticut had a "BCR add-on" when its tax rate on the taxable portion of covered wages in the previous calendar year was less than the 5-year benefit–cost ratio applicable for the taxable year.
Based on their loan status on November 10, 2016, California and the Virgin Islands are the only two jurisdictions that received reduced FUTA credit for taxable year 2016. Employers in these states will pay extra FUTA taxes that are effective retroactively to January 1, 2016.
Below is a list of FUTA state credit reductions for taxable year 2009 through 2016, and their respective reduction amounts (in %):
| State or District | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016[4] |
|---|---|---|---|---|---|---|---|---|
| Arizona | – | – | – | 0.3 | – | – | – | – |
| Arkansas | – | – | 0.3 | 0.6 | 0.9 | – | – | – |
| California | – | – | 0.3 | 0.6 | 0.9 | 1.2 | 1.5 | 1.8 |
| Connecticut | – | – | 0.3 | 0.6 | 0.9 | 1.7 | 2.1 | – |
| Delaware | – | – | – | 0.3 | 0.6 | – | – | – |
| Florida | – | – | 0.3 | 0.6 | – | – | – | – |
| Georgia | – | – | 0.3 | 0.6 | 0.9 | – | – | – |
| Illinois | – | – | 0.3 | – | – | – | – | – |
| Indiana | – | 0.3 | 0.6 | 0.9 | 1.2 | 1.5 | – | – |
| Kentucky | – | – | 0.3 | 0.6 | 0.9 | 1.2 | – | – |
| Michigan | 0.3 | 0.6 | 0.9 | – | – | – | – | – |
| Minnesota | – | – | 0.3 | – | – | – | – | – |
| Missouri | – | – | 0.3 | 0.6 | 0.9 | – | – | – |
| North Carolina | – | – | 0.3 | 0.6 | 0.9 | 1.2 | – | – |
| New Jersey | – | – | 0.3 | 0.6 | – | – | – | – |
| Nevada | – | – | 0.3 | 0.6 | – | – | – | – |
| New York | – | – | 0.3 | 0.6 | 0.9 | 1.2 | – | – |
| Ohio | – | – | 0.3 | 0.6 | 0.9 | 1.2 | 1.5 | – |
| Pennsylvania | – | – | 0.3 | – | – | – | – | – |
| Rhode Island | – | – | 0.3 | 0.6 | 0.9 | – | – | – |
| South Carolina | – | 0.3 | – | – | – | – | – | – |
| Vermont | – | – | – | 0.3 | – | – | – | – |
| Virginia | – | – | 0.3 | – | – | – | – | – |
| Virgin Islands | – | – | 0.3 | 1.5 | 1.2 | 1.2 | 1.5 | 1.8 |
| Wisconsin | – | – | 0.3 | 0.6 | 0.9 | – | – | – |
FUTA and general taxes comparison table
editThe major taxes that employers have to pay include FUTA, SUTA, Sales Tax, Medicare, and Social Security.[5]
| Tax | Percentage | Conditions |
|---|---|---|
| Sales Tax | varies by state, between 0% to less than 10%[6] | A consumer tax collected for the government by the business and applied at the final point of sale (retailer, wholesalers, etc. excluded) |
| SUTA | Varies by State. Generally 2–5% | Employers only. |
| FUTA | 6%. Can be reduced to 0.6% | Employers only |
| Medicare | 1.45% (matched by employer) | Employers and Employees. Rate can go to 2.4% for employees earning above $200,000. |
| Social Security | 6.2% | Employers and Employees |
Businesses also pay many other taxes, such as state franchise taxes, business inventory taxes, property taxes, state income tax, federal income tax, etc.
Exempt wages
editThe following wages are exempt from Federal Unemployment Tax Act payments:
- Wages for services performed outside the United States.[7]
- Wages paid to a deceased employee or a deceased employee's estate in any year after the year of the employee's death.[7]
- Wages paid by a parent to a child under age 21, paid by a child to a parent, or paid by one spouse to the other spouse.[7][8]
- Wages paid by a foreign government or international organization.[7][9]
- Wages paid by a state or local government or by the United States federal government.[7][10]
- Wages paid by a hospital to interns.[7][11]
- Wages paid to newspaper carriers under age 18.[7][12]
- Wages paid by a school to a student of the school.[7][13]
- Wages paid by an organized seasonal camp to a full-time student who worked fewer than 13 calendar weeks during the calendar year.[7][14]
- Wages paid by 501(c)(3) nonprofit organizations.[15][16]
See also
editReferences
edit- ^ See 26 U.S.C. § 3301.
- ^ Internal Revenue Service (October 28, 2015). "2015 Instructions for Form 940" (PDF). Retrieved February 21, 2016.
- ^ Publication 15 (Circular E) for 2011, "Employer's Tax Guide", p. 29, Internal Revenue Service, U.S. Dep't of the Treasury; see also 26 U.S.C. § 3301.
- ^ Employers in 2016 FUTA credit reduction states must adjust their unemployment tax liability on their Form 940
- ^ "What is FUTA Tax 2020? Breaking Down the Federal Unemployment Tax Act". Finimpact. 2020-05-05. Retrieved 2020-05-06.
- ^ "State and Local Sales Tax Rates". Tax Foundation. 2021-01-06. Retrieved 2021-08-31.
- ^ a b c d e f g h i "Publication 15: (Circular E) Employer's Tax Guide" (PDF). Internal Revenue Service. United States Department of the Treasury. 2009.
- ^ "26 U.S. Code Section 3306(c)(B)(5)". Legal Information Institute. Retrieved August 18, 2015.
service performed by an individual in the employ of his son, daughter, or spouse, and service performed by a child under the age of 21 in the employ of his father or mother
- ^ "26 U.S. Code Section 3306(c)(B)(10) and (11)". Legal Information Institute. Retrieved August 18, 2015.
service performed in the employ of a foreign government (including service as a consular or other officer or employee or a nondiplomatic representative); service performed in the employ of an instrumentality wholly owned by a foreign government if the service is of a character similar to that performed in foreign countries by employees of the United States Government or of an instrumentality thereof; and if the Secretary of State shall certify to the Secretary of the Treasury that the foreign government, with respect to whose instrumentality exemption is claimed, grants an equivalent exemption with respect to similar service performed in the foreign country by employees of the United States Government and of instrumentalities thereof
- ^ "26 U.S. Code Section 3306(c)(B)(7)". Legal Information Institute. Retrieved August 18, 2015.
service performed in the employ of a State, or any political subdivision thereof, or in the employ of an Indian tribe, or any instrumentality of any one or more of the foregoing which is wholly owned by one or more States or political subdivisions or Indian tribes; and any service performed in the employ of any instrumentality of one or more States or political subdivisions to the extent that the instrumentality is, with respect to such service, immune under the Constitution of the United States from the tax imposed by section 3301
- ^ "26 U.S. Code Section 3306(c)(B)(13)". Legal Information Institute. Retrieved August 18, 2015.
service performed as a student nurse in the employ of a hospital or a nurses' training school by an individual who is enrolled and is regularly attending classes in a nurses' training school chartered or approved pursuant to State law; and service performed as an intern in the employ of a hospital by an individual who has completed a 4 years' course in a medical school chartered or approved pursuant to State law
- ^ "26 U.S. Code Section 3306(c)(B)(15)". Legal Information Institute. Retrieved August 18, 2015.
service performed by an individual under the age of 18 in the delivery or distribution of newspapers or shopping news, not including delivery or distribution to any point for subsequent delivery or distribution; [or] service performed by an individual in, and at the time of, the sale of newspapers or magazines to ultimate consumers, under an arrangement under which the newspapers or magazines are to be sold by him at a fixed price, his compensation being based on the retention of the excess of such price over the amount at which the newspapers or magazines are charged to him, whether or not he is guaranteed a minimum amount of compensation for such service, or is entitled to be credited with the unsold newspapers or magazines turned back
- ^ "26 U.S. Code Section 3306(c)(B)(10)(B)". Legal Information Institute. Retrieved August 18, 2015.
- ^ "26 U.S. Code Section 3306(c)(B)(20)". Legal Information Institute. Retrieved August 18, 2015.
service performed by a full time student ... in the employ of an organized camp if such camp did not operate for more than 7 months in the calendar year and did not operate for more than 7 months in the preceding calendar year, or had average gross receipts for any 6 months in the preceding calendar year which were not more than 33 1/3 percent of its average gross receipts for the other 6 months in the preceding calendar year; and if such full time student performed services in the employ of such camp for less than 13 calendar weeks in such calendar year; or
- ^ "Publication 15-A: Employer's Supplemental Tax Guide" (PDF). Internal Revenue Service. United States Department of the Treasury. 2009.
- ^ "26 U.S. Code Section 3306(c)(B)(8)". Legal Information Institute. Retrieved August 18, 2015.
service performed in the employ of a religious, charitable, educational, or other organization described in section 501(c)(3) which is exempt from income tax under section 501(a)