Labor Laws

Unemployment Tax

Unemployment Insurance (UI) is a federal and state joint venture that is provided through taxation of federal and state employees. In general, employers are obliged to pay state and federal unemployment taxes if:

• They pay an employee at least $1,500 over the course of any quarter of a calendar year.
or
• They had a minimum of one employee on the clock everyday of the week for 20 weeks during the calendar year whether it is continuous or not.

State laws are not all identical to federal laws, so employers should contact their local employment agency to learn the exact specifications.

The Federal Unemployment Tax Act (FUTA) grants the Internal Revenue Service permission to collect a federal employer tax that provides financial backing for state workforce agencies. Employers file this tax yearly by filing IRS Form 940. FUTA funds all UI and Job Service programs across the country. It also pays 50 percent of the cost of extended unemployment benefits only during periods of excessive unemployment and offers money for states to borrow to pay benefits.

The FUTA tax rate is 6.2 percent of taxable income. Taxable wages include the first $7,000 paid out to an employee during a calendar year. Employers who pay state unemployment tax in a timely fashion are eligible for an offset credit of as much as 5.4 percent in spite of their state tax rate. With this in mind, the net FUTA tax rate is normally .8 percent with an annual limit of $56 per employee. Unemployment insurance tax rates are determined by state legislation.

State Unemployment Tax given to state workforce agencies is only used to provide compensation to qualified unemployed laborers.

Employers of domestic, or household, workers must pay state and federal unemployment taxes if they pay their employees at least $1,000 cash during a quarter of the present or previous calendar year. A domestic worker is an employee who offers services to the owners of a home. Some examples of household employees include:

• Babysitters
• Caretakers
• Maids
• Drivers
• Nannies
• Butlers
• Medical aides
• Landscapers

Employers are required to pay federal unemployment taxes if:

• They pay employees a cash stipend of at least $20,000 in any quarter of the calendar year.
or
• They had no less than ten employees providing agricultural services on at least one day of 20 different weeks in the present or prior calendar year. The 20 weeks do not have to be uninterrupted, and all ten employees do not have to be the same. These employees also do not have to all work identical shifts.

By and large, agricultural employers are susceptible to paying state unemployment taxes, and it is recommended that they contact their local state workforce agency to learn the particular requirements.