Question: What is FUTA Tax?
Answer: The Federal Unemployment Tax Act (FUTA), with state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs. Most employers pay both a Federal and a state unemployment tax.
Employees or workers are NOT liable for FUTA Tax. Only the employers pay for this tax.
The FUTA tax rate is normally 6% of taxable wage but includes a credit of 5.4% for payment of State Unemployment Insurance (UI) taxes, making the effective FUTA rate of 0.6% of wages paid up the to the taxable limit of $7,000. ($42 per employee per year, 0.6% * $7,000). However, for states that have depleted their UI funds, part of the 5.4% is reduced thereby increasing the FUTA tax for those states.
In summary, it’s 0.6% percent on the first $7,000 in taxable income or $42 per person. Only the employers pay for the FUTA Tax and it is not deducted from wages.