Federal Unemployment Tax Act (FUTA)

Federal Unemployment Tax Act (FUTA) inflation rate is used to calculate tax liability, which is assessed by the Federal Unemployment Tax Act system.

This was established in 1939 with the purpose of providing a source of income for states during economic downturns. The Federal Unemployment Tax Act collects tax from employers and workers to fund tax benefits.

These federal benefits are for workers who have lost their jobs through no fault of their own, or could not work because of a natural disaster, such as an earthquake.

Employers are required to pay FUTA if they have employees working in the United States. This is collected through payroll tax deductions from employees’ wages or Federal tax withholdings from employees’ wages.

Purpose of Federal Unemployment Tax Act

The Federal Unemployment Tax Act (FUTA is one of the Federal taxes that businesses must pay.

It has two purposes: to provide money for paying unemployment benefits and to enable states to finance programs that provide reemployment services and benefits.

For example, FUTA contributes to federal-state unemployment insurance programs which are the primary form of federal unemployment assistance.

The funds that are collected expire after 2 years if they are not used for this purpose.

History of the Federal Unemployment Tax Act

FUTA was created during one of America’s greatest crises, the Great Depression.

During this time, unemployment had reached 25% of the nation’s workforce and many people were in need of new federal assistance programs set up to help the unemployed find work again.

At that time, unemployment insurance benefits were only available to those working for companies that had opted into state unemployment programs.

On August 4, 1935, during President Franklin Delano Roosevelt’s presidency, federal unemployment benefits were created by Congress and the Federal Unemployment Tax Act was signed into law.

What Are the Effects of Inflation on the FUTA Rate?

Inflation occurs when prices rise, which means that the federal government must increase Federal Unemployment Tax Act rates along with the prices of goods and services.

With this, inflation can affect federal unemployment tax rates. There are three reasons for this:

  1. FUTA is an employer-paid federal tax, which means that employers do not receive any federal tax refunds for money they pay into the Federal Unemployment Account.

This means that if inflation rises, so does the federal unemployment tax liability for employers.

  1. Federal unemployment tax rates are based on federal poverty levels, which are recalculated each year by the federal government.

This means that the federal poverty level increases with inflation and this affects federal unemployment tax rates as well.

  1. The tax rates are set by Congress, and the federal government adjusts the rates to keep up with inflation.

These tax rate adjustments can affect federal unemployment tax liabilities for both employees and employers.

To keep up with inflation, employers are taxed more by Federal Unemployment Tax Act every year.

If the tax rates remain flat or decrease, it is because the federal government has not increased the tax rates to compensate for inflation, or they have adjusted the tax credits which reduce the tax liability.

How to Calculate Your Federal Unemployment Tax Act Liability

In general, FUTA requires employers whose total wages paid exceed $1,500 in any calendar quarter in the current or preceding calendar year to pay the tax.

Employers are subject to Federal Unemployment Tax Act until they have paid wages for 26 weeks, in a rolling time period.

In calculations of the taxes, the federal government uses this formula:

Tax_Calculation_for_FUTA

For example, if FUTA has a rate of 6.2% and an employer pays $100,000 in wages to employees in one quarter, the tax liability would be $6,200 ($100,000 x .062).

How to Reduce Your Federal Unemployment Tax Act Liability

There are Federal unemployment credits that reduce tax based on the amount of Federal unemployment insurance taxes that an employer’s state has collected. The tax credit amounts range from 5 to 8 percent.

For example, if your federal unemployment insurance tax is $1,000, you can reduce the Federal Unemployment Tax Act by 5 percent or $50.

It is important to note that both federal employers and employees contribute 6.2% of the first $7000 that an employee makes in wages up to a maximum contribution of $42 per employee.

In order for a federal employer tax credit to reduce, the federal government requires that federal unemployment taxes must be paid in a timely manner and that the tax returns must be filed on time.

The Importance of Understanding How This Will Affect You When Filing Taxes 

Not only Federal Unemployment Tax Act rates increase, but this also affects Federal Income Tax and Federal Withholding tax.

With these taxes increasing, it is important to understand what the effects of this may be when filing income taxes in order to ensure that you are filing federal unemployment tax returns correctly.

This will change how much Federal Income tax and Federal Withholding that you owe or your refund will be.

Concluding Thoughts

Although Federal Unemployment Tax Act rates increase with inflation, Federal Income Tax and Federal Withholding depend upon so many factors that it is important to consult a tax professional.

Understanding the effects of FUTA will help you calculate your Federal Income Tax more accurately so that it will benefit you when filing federal income taxes.

However, Federal Withholding and Federal Unemployment Tax Act rates tend to increase while Federal Income Tax tends to be more stable.

It is important to note that while Federal Unemployment Tax Act rates will continue to rise, Federal Withholding rates are much harder to predict, as there are many other factors that play into Federal Withholding tax rate changes.

The Federal Unemployment Tax Act (FUTA) is a Federal law that requires employers to pay federal taxes on the first $7000 of an employees' wages. The federal government currently has a 6.2% FUTA tax rate, but this number will increase due to inflation.
The Federal Unemployment Tax Act requires employers who meet certain criteria to pay the tax. Employers are subject to this until they have paid wages for 26 weeks, in a rolling time period.
In order to calculate Federal Unemployment Tax Act, you must first know the tax that is being paid. In calculations, employers use this formula: [Wages Paid * Federal Unemployment Tax Rate].
Yes, Federal Unemployment Tax Act rates will continue to rise with inflation because the federal government adjusts the Federal Unemployment Tax Act rate annually.
There are Federal unemployment credits that reduce the Federal Unemployment Tax Act based on the amount of Federal unemployment insurance taxes that an employer's state has collected. The tax credit amounts range from 5 to 8 percent.
True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.