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Simple English definitions for legal terms
Federal Unemployment Tax Act (FUTA)
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A quick definition of Federal Unemployment Tax Act (FUTA):
Federal Unemployment Tax Act (FUTA) is a law that was made in 1939 to help people who lose their jobs. It says that employers have to pay a tax of 6% on the first $7,000 that each worker makes in a year. This tax money is used to give unemployment benefits to people who are out of work. Employers have to pay all of the tax, and there are some exceptions for certain types of wages. If an employer pays a state unemployment tax, they can deduct some of it from their federal unemployment tax.
A more thorough explanation:
The Federal Unemployment Tax Act (FUTA) is a law that was passed in 1939. It requires employers to pay a tax to fund unemployment benefits for workers who lose their jobs. The tax is 6% of the first $7,000 that each employee makes in a year. Employers are responsible for paying the tax, not the employees.
For example, if a company paid three employees last year, Tina, Jerry, and Patricia, they would owe taxes of $420 for Tina (6% of $7,000), $420 for Jerry, and $300 for Patricia. This tax is in addition to other payroll taxes that employers must pay.
There are some exceptions to FUTA. For example, income from a deceased spouse and wages from a 501(c)(3) organization are not subject to FUTA taxes. Additionally, employers can deduct state unemployment taxes from their federal unemployment taxes up to 5.4%. This means that if a company paid a 3% state unemployment tax on an employee's wages, they would only have to pay a 3% federal unemployment tax.
The purpose of FUTA is to provide financial assistance to workers who lose their jobs through no fault of their own. The taxes paid by employers go into a fund that is used to pay unemployment benefits to eligible workers. This helps to reduce the financial burden on workers who are struggling to make ends meet while they search for new employment.