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Federal and State Unemployment Taxes Explained


Unemployment taxes are one of those unavoidable taxes for business. Unemployment taxes are based on employee wages and these taxes go into funds to pay benefits to employees who have been terminated, laid off, or fired. Here is the information you need to calculate, report, and pay unemployment taxes.

1. What are Unemployment Taxes?

The unemployment tax system works like this:
  • Employers into the system, based on a percentage of total employee wages
  • The amount paid is put into a fund which pays unemployment benefits to employees who have been laid off (not for those who have left voluntarily).
  • The federal government collects unemployment funds and pays into state funds to supplement funds the states collect.

2. What is FUTA - Federal Unemployment Tax Act?

Federal Unemployment Tax (FUTA) is paid by employers on behalf of employees. The tax, paid to the IRS, is used to fund unemployment for workers who are laid off or terminated involuntarily. It doesn't cover employees who quit their jobs. FUTA is based on a percentage of employee gross wages, and should be set aside by employers to be paid periodically.

3. How Does Unemployment Compensation Work?

Unemployment compensation is paid to workers who have bee laid off, but not to those who leave voluntarily. It is paid by states, according to a formula. The states receive federal unemployment compensation funds from the federal unemployment compensation account, to which businesses contribute.

4. What is Form 940 - Employer's Federal Unemployment (FUTA) Tax Return?

Form 940 is the annual unemployment tax return that must be filed by each employer. The form is filed in February for the previous calendar year. The form shows the employer's unemployment tax liability and how much the employer has paid toward this liability; any unpaid funds are paid with the 940 form.

6. When Must I Make Unemployment Tax Deposits?

The requirement for making federal unemployment tax deposits depends on the amount you owe at the end of each quarter. Read more....

7. How Do I Make Unemployment Tax Payments?

Federal unemployment taxes must be paid using the Electronic Federal Tax Payment System (EFTPS). You can no longer make federal tax payments using Form 8109 - Tax Deposit Coupon, after January 1, 2011.

8. How Can I Find Out About State Unemployment Taxes I Must Pay?

Every U.S. state has an unemployment tax fund to which employers are required to contribute. Learn about the requirements of your state here.



More About All Types of Employment Taxes

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