FUTA stands for the Federal Unemployment Tax Act, and it’s one of the taxes employers have to pay as part of payroll taxes. The tax is 6% on an employee’s first $7,000; any wages above $7,000 are not taxed.
FUTA taxes fund federal unemployment insurance, which is a government program that provides temporary financial support to eligible employees after they’ve been terminated due to no fault of their own. Eligible workers typically receive a check each week until they are once again employed or they exhaust the covered time period.
Which employees are eligible for unemployment insurance after they’re terminated?
Employees who were terminated for “no fault of their own,” like a layoff, are typically eligible for federal unemployment. In general, employees are not eligible for unemployment insurance if they are terminated for cause or quit their job. There are some variations per state, however, so be sure to check with a local HR expert.
Who pays for unemployment insurance?
Employers pay for unemployment insurance through both federal and state payroll taxes. The federal tax is called FUTA (Federal Unemployment Tax Act) and the state tax is called SUTA (State Unemployment Tax Act). These taxes are:
- Collected while a worker is employed and end when the employee is terminated; and
- Shown on your employees’ pay stubs each payday.
Does my business need to pay unemployment insurance taxes?
Generally, your business needs to pay both federal and state unemployment insurance taxes if you:
- Paid $1,500 or more in wages to employees during in any quarter of one calendar year; or
- Had at least one employee any day of a week for 20 or more weeks in a calendar year. These weeks do not have to be consecutive.
Be careful, however, as many states have their own twist on the books about which employers need to pay unemployment insurance taxes. Check your state’s Department of Labor website to discover the exact rules that affect your situation.
What are my unemployment insurance tax rates?
Your unemployment insurance tax rates are set at both the federal and state levels.
Federal taxes: The current federal unemployment insurance tax rate is 6% and applies to the first $7,000 paid to each employee (called the “wage base”) during the year.
However, if you pay your state unemployment taxes on time, you’ll likely earn a 5.4% federal tax credit, making the effective FUTA rate .6% and bringing your maximum payment per employee down.
State taxes: Each state uses a different tax rate and wage base for their unemployment tax. To find out the details for your state, click here or visit your state’s Department of Labor website.
What happens when an employee claims unemployment insurance?
When an employee claims unemployment insurance, you’ll receive a “Notice of Unemployment Insurance Claim Filed” from your state’s unemployment office. (Here’s an example from California).
This form is your state’s attempt to:
- Establish that your ex-employee’s is in fact eligible for unemployment insurance; and
- Discover how much the ex-employee has and will be paid in order to determine the amount of money to payout each week.
If you agree that your former employee is eligible, then complete the form so the state can begin sending checks to your ex-employee.
In some cases however, you might want to contest an unemployment insurance claim.
Why would I contest an unemployment insurance claim?
You might want to contest an unemployment insurance claim because you believe the former employee is not eligible for it. If you want to protest the claim, it’s best to have documentation that backs up your reasons for terminating that employee and why that employee is not eligible.
Can my unemployment insurance change?
Yes, your unemployment insurance tax rates can change, and can go up if more former employees successfully claim it. States have both a minimum and maximum unemployment insurance tax rate.