Overview:The Federal Unemployment Tax Act (FUTA), along with state unemployment insurance systems, pays unemployment insurance benefits to employees who lose their jobs through no fault of their own. While FUTA taxes are not withheld from employees' pay, most employers must pay FUTA taxes on a quarterly basis up to an annual wage base. The base FUTA tax rate is 6% and the taxable wage base is $7,000. Most employers also must pay state unemployment insurance taxes, although at different annual wage bases and tax rates than under FUTA. A few states also require employees to contribute into the system. Employers can take steps to reduce their federal unemployment insurance tax rates.
FUTA Credits: Employers may be able to reduce their overall FUTA liability by taking credits against state unemployment insurance contributions paid. Beware that these credits may be reduced in a given year if the state where the employer is located is a credit reduction state - a state that has borrowed money from the federal government to pay regular benefits during times of high unemployment, but that has failed to pay back the loans by certain dates. The US Department of Labor certifies by each November 10 which states have taken steps toward financial solvency.
Employer Benefit Overpayment Penalties: Employers may be subject to higher unemployment insurance (UI) benefit costs if they do not properly respond to UI claim notices received from state labor departments requesting information about benefit claims. This is because the unemployment insurance laws in every state and the District of Columbia now conform to the federal Trade Adjustment Assistance Extension Act (TAAEA). These laws prevent individuals who file UI benefit claims from receiving greater amounts of benefits than they are actually entitled to and improve the states' ability to recover such overpayments. However, some sates impose even stricter standards than those required by the TAAEA.
Author: Rena Pirsos, JD, Legal Editor
Updated to reflect the applicability of filing penalties, effective January 1, 2019.
Updated to reflect the 2019 state taxable wage base amounts.
Updated to include forthcoming inflation-adjustments to penalty amounts for 2019 information returns, and proposed regulations regarding de minimis error safe harbor exceptions to information return filing penalties.
In-depth review of the spectrum of Washington employment law requirements HR must follow with respect to unemployment insurance tax (FUTA/SUTA).
Updated to include a provision regarding disqualification from unemployment benefits for misconduct, effective August 24, 2018.
Updated to include the paid family leave contribution rate, effective January 1, 2019.
Updated to include a provision addressing eligibility for unemployment benefits during temporary layoffs, effective July 9, 2018.
Updated to reflect an increase in the penalty for failing to timely file quarterly reports, effective July 1, 2018.
Updated to include the Property Service Workers Protection Act, effective July 1, 2018.
Updated to reflect protections against identity theft under the Michigan Employment Security Act, effective March 21, 2018.
Compliance with federal (FUTA) and state (SUTA) unemployment insurance taxes and employer options for reducing their tax rates.