Federal Unemployment Tax Act (FUTA) was the bill passed in 1939 that established a payroll tax to fund unemployment benefits. The tax is 6% of the first $7,000 that each employee makes in a year, and the employer is responsible for all of the tax unlike similar payroll taxes. For example, if XYZ Co. paid Tina $20,000, Jerry $7,000, and Patricia $5,000 last year, XYZ Co. would owe taxes of $420 for Tina (maximum $7000*6%), $420 for Jerry, and $300 for Patricia ($5000*.06). There are exceptions for some wages that do not fall under FUTA such as income from a deceased spouse or wages from a 501(c)(3) organization.
Also, a person may deduct state unemployment taxes from their federal unemployment taxes up to 5.4%. For example, if XYZ Co. paid a 3% state unemployment tax on Tina’s $20,000 wages, they would only have to pay a 3% federal unemployment tax.
[Last updated in January of 2022 by the Wex Definitions Team]