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Unemployment Taxes

Organizations pay unemployment taxes on behalf of their employees. Unemployment taxes are referred to as the Federal Unemployment Tax Act (FUTA) and they work in conjunction with the State Unemployment Tax Act (SUTA). The current FUTA rate is 6% of employee’s compensation, up to $7,000. Employers can take a credit on their FUTA tax of up to 5.4% if they are required by their state to pay SUTA. When an employer qualifies for the maximum SUTA credit, they are only required to pay a 0.6% tax rate towards FUTA. Each time an employee is paid, an employer is required to set aside funding for FUTA. The maximum FUTA is $1,500/employee per quarter. These taxes are normally paid on a quarterly basis using Form 940. 

Unemployment taxes are collected to help fund the income of employees who have lost their jobs. It also establishes employment resources and programs in which unemployed workers can receive employment assistance and are placed in temporary positions until they find permanent work. 

New employers often pay a higher rate towards FUTA and SUTA. This rate is based on the company’s experience rating. Since new companies have a low experience rating, they are required to pay a higher tax rate. As a company becomes more experienced, the unemployment tax rate will decrease. Some industries pay a higher rate because of their higher turnover rate. Restaurants and construction companies often experience higher turnover, resulting in a consistently higher unemployment rate. These companies have a greater responsibility towards funding former employees’ income during periods of unemployment.

When an employee loses their job, unemployment insurance pays for half of their income for a period of 6 months. Some individuals may qualify for an extension of their unemployment benefits during periods of high unemployment in the economy. 

Some employers may be exempt from paying unemployment tax if they fall under the following categories:

  • The organization pays wages for work performed outside of US

  • They pay students working for a university under work study

  • Parents paying wages to their children under 21 years of age

  • Wages paid by a non-profit organization

  • Wages paid by local and state governments