Federal Unemployment Tax Act - FUTA

The Federal Unemployment Tax Act, which is more fun to call FUTA, is the law that says the US federal government is allowed to tax businesses that have employees in order to pay for state unemployment programs…mostly covering unemployment insurance, but also job programs.

The US is unique in the way it handles federal and state matters like this. The federal government is the one doing the unemployment tax, so it happens everywhere, in all states, but then it gives that money to state governments, since each state has its own quirky unemployment rules and programs.

Employers know this tax from their annual Form 940 that they fill out for the IRS. The federal unemployment tax is calculated as a percentage of worker income. That way, the federal government is saving up bit by bit to cover you and everyone else when they’re in between jobs. Hey, it happens to the best of us.

So why do you pay it? Well, remember it fondly the next time you are fired and have rent and food bills to cover.