What Is FUTA Tax?

If you were trying to come up with possible meanings for the acronym FUTA, you could surely draft some fun options: Frivolous Upstarts’ Travel Agency, Famous Uncles Teaching Astronomy, or Funny/Unfunny Turtle Actors. The true meaning of the acronym, Federal Unemployment Tax Act—though less amusing—is nevertheless undeniably impactful for your small business.

So what is FUTA tax? The Federal Unemployment Tax Act is a law that ensures employees receive compensation if they lose their jobs. The FUTA taxes that you pay as a small business owner are then utilized by the federal government to run the unemployment program nationwide.

The payment of FUTA tax is solely the employer’s burden—this means you can’t deduct it from your employees’ wages. Your responsibilities as an employer run deep, and they don’t just evaporate if an employee loses their job. As long as that employee is eligible for unemployment, the money you paid through FUTA taxes is part of the pool of money that goes toward their support.

In many ways, FUTA tax is similar to the social security and Medicare taxes your business also pays. These funds are paid at the federal (and often state) level to fund programs and care for America’s workforce. The impact of your tax payments may not always be readily apparent, but those who find themselves struggling with employment or healthcare access can gain an immediate appreciation for them.

Wondering what qualifies an employee for unemployment benefits? The details vary from state to state, but you can assume that employees will get benefits if they lose their job due to a layoff. If their job was terminated because of misbehavior or other at-fault causes, they likely wouldn’t be able to obtain unemployment benefits.

Additionally, the employee will need to meet the wages earned or time worked requirements set by the state. For example, this might mean that an employee would get the green light for benefits if he’d been employed for the 5 months prior to his job loss. If he’d been unemployed for the majority of that time, only to briefly get a job and then lose it, he probably wouldn’t qualify.

You can learn more about your state’s unique unemployment benefits and eligibility requirements by visiting this resource provided by the US Department of Labor.

On the federal level, you’re required to pay FUTA tax for each employee. The tax rate and taxable wage base can change from year to year, so it’s always wise to check with the IRS and make sure you have the most up-to-date information. Take a moment now to review the IRS website if you have questions.

It’s worth noting that you may be able to receive a FUTA tax credit of up to 5.4%. Qualifying for this credit is dependent on you paying your state unemployment taxes in full and on time. Also, your state can’t have delinquent federal loans being used to cover unemployment benefits. It’s unlikely that your state is currently past due on such loans, so as long as you’re prompt with your state unemployment taxes, you should be in great shape to earn this credit.