What is the Federal Unemployment Tax Act (FUTA) tax rate?

What is the Federal Unemployment Tax Act (FUTA) tax rate?

• A. 4%
• B. 6%
• C. 8%
• D. 10%

Answer: (B)

The Federal Unemployment Tax Act (FUTA) establishes a federal tax system where employers pay taxes to fund unemployment compensation. The standard FUTA tax rate is indeed 6% on the first $7,000 of each employee's wages. This tax is used to support unemployment benefits and is imposed on employers only, not on employees. It's essential to note that while the nominal tax rate is 6%, employers can receive a credit of up to 5.4% for state unemployment taxes paid, which can effectively reduce their FUTA liability to as low as 0.6%. The maximum credit is available if the state has a qualifying unemployment tax system in place. Understanding these aspects of FUTA is crucial for payroll professionals, as they must calculate and report these taxes accurately and ensure compliance with federal regulations.

The Federal Unemployment Tax Act (FUTA) establishes a federal tax system where employers pay taxes to fund unemployment compensation. The standard FUTA tax rate is indeed 6% on the first $7,000 of each employee's wages. This tax is used to support unemployment benefits and is imposed on employers only, not on employees.

It's essential to note that while the nominal tax rate is 6%, employers can receive a credit of up to 5.4% for state unemployment taxes paid, which can effectively reduce their FUTA liability to as low as 0.6%. The maximum credit is available if the state has a qualifying unemployment tax system in place.

Understanding these aspects of FUTA is crucial for payroll professionals, as they must calculate and report these taxes accurately and ensure compliance with federal regulations.