Federal Unemployment Tax Act

• The Federal Unemployment Tax Act (FUTA) is a tax imposed on employers that helps fund unemployment insurance. According to the U.S. Department of Labor, the FUTA tax rate is 6.2 percent and funds raised pay for the administrative costs of the unemployment insurance program as well as state workforce agencies and job service programs. FUTA applies to the first $7,000 of wages earned by each employee per year. If employers pay state unemployment taxes in a timely manner, they are eligible for a discount on FUTA taxes of up to 5.4 percent. In other words, employers may only be subject to a 0.8 percent FUTA tax rate.
  
  

State Unemployment Taxes

• State unemployment taxes are payroll taxes imposed on employers and collected by the state workforce agencies funded by FUTA. The United States Department of labor states that the money collected by state workforce agencies is used solely to pay unemployment benefits to eligible unemployed workers. In other words, federal taxes pay for the basic infrastructure of the unemployment insurance program while state taxes fund the actual benefits that unemployed individuals receive. Unemployment tax laws vary from one state to another.
  
  

Employee Taxes

• While payroll taxes imposed on employers fund unemployment benefits in most states, some states impose unemployment taxes on employees. Alaska, New Jersey, and Pennsylvania are the only states that impose unemployment insurance taxes on workers. Taxes are deducted automatically from employee pay and sent to state workforce agencies.
  
  

Considerations

• Unemployment taxes imposed on employers apply to households that employ domestic employees in some cases. The Department of Labor states that if you employ a household worker and pay him $1,000 or more in wages in any quarter, you are subject to state and federal unemployment taxes. Workers that are considered domestic employees include babysitters, nannies, caretakers and maids.