DEFINITION of 'Federal Unemployment Tax Act - FUTA'

The original legislation that allows the federal government to tax businesses with employees for the purpose of collecting revenue that is then allocated to state unemployment agencies and paid to unemployed workers who are eligible to claim unemployment insurance. The Federal Unemployment Tax Act requires employers to file IRS Form 940 annually in conjunction with paying this tax.

BREAKING DOWN 'Federal Unemployment Tax Act - FUTA'

The amount of an employer's FUTA tax liability determines when the tax must be paid; the form for reporting the tax is due in the first quarter of the year. As of Jul. 1, 2011, the FUTA tax rate was 6% of the first $7,000 paid to each employee annually. This means that if a company had 10 employees who each earned wages of at least $7,000 for the year, the company's annual FUTA tax would be 0.06 x $70,000 = $4,200. Only employers, not employees, pay the FUTA tax. Many states collect an additional unemployment tax from employers.

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