The Federal Unemployment Tax Essay

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The Federal Unemployment Tax Act (FUTA) is a law established by the United States Federal legislation imposing a payroll tax on any business that has a working force. Some percent of wages is retained by the employer from the employee’s pay, who then remits the funds to the government on the worker’s behalf (Kikuchi & Tamai, 2019). The revenue raised from these taxes is used to fund unemployment benefits. This tax is paid by employers only, even though it is imposed on employee wages. However, beneficiaries of FUTA are workers who have lost their jobs.

The FUTA rate was last changed in the year 2016 when the charges were raised in most of the states. A large number of companies were not prepared for this change, as they opted to file their Form 940 in January 2016. This means that employees had to pay a higher percentage of their wages towards FUTA. In that regard, staff members were left with less money to spend on buying their essentials. Higher taxes translate to stronger work disincentives, and the burden discourages business owners from hiring personnel.

Federal laws currently provide employers with a 5.4 percent FUTA tax credit reduction if they pay their quarterly unemployment on time using Form 940. The standard FUTA tax rate is 6.0% on the first $7,000 of wages subject to FUTA (Kikuchi & Tamai, 2019). The above applies before and after the 5.4 percent credit reduction. The maximum amount paid by employees to FUTA is $42 ($7,000 X 0.6%). In cases where a state or business does not receive the tax credit, employees pay a maximum of $420 ($7,000 X 6%) (Kikuchi & Tamai, 2019). In my opinion, FUTA tax rates will rise and FUTA tax credits will reduce. High joblessness rates since the COVID-19 pandemic have caused states to suffer record-high unemployment rates, making the state’s unemployment trust fund unable to pay bills.

Reference

Kikuchi, Y., & Tamai, T. (2019). International Tax and Public Finance, 26(4), 899-918.

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