Created by the Federal Unemployment Tax Act , federal unemployment insurance (FUI) taxes are used to fund a program that supports workers who lose their jobs. States may also collect their own unemployment insurance taxes in addition to, or instead of, the federal tax. Employers are responsible for paying the FUI taxes and may not take amounts from the employee’s paycheck for this purpose.
Who Must Pay
Federal unemployment insurance taxes are exclusively the responsibility of employers. However, not every employer is liable for FUI taxes. Employers who employed someone at least one day in 20 or more weeks, or employers who paid wages of at least $1,500 in any calendar quarter must pay FUI taxes.
Household Employees
Individuals may also count as employers if they pay wages to household employees. Household employees are workers such as maids, nannies, babysitters or anyone who works in or around your house under your direction. Individuals must pay FUI taxes for their household employees’ wages if they pay at least $1,000 in any calendar quarter.
How to File
Employers who meet the FUI tax requirements above must file with the IRS. Most employers will file the Form 940, although householder employers can report FUI taxes on their Schedule H (Household Employment Taxes) to simplify their tax filings.
Tax Rate
Rates are set by Congress and can vary. For 2013, employers must pay 6 percent on the first $7,000 of each employee’s wages. Employers must submit payments at least once a year, or at the end of the quarter during which cumulative unpaid FUI taxes equal or exceed $500.
State Unemployment Tax Credit
Employers who pay state unemployment tax on employees’ wages may be eligible for a credit against their FUI tax liability. The maximum credit available is 5.4 percent of taxable wages paid, leaving at least 0.6 percent on taxable wages for the federal unemployment insurance fund.
