HR Glossary
Federal Unemployment Tax Act (FUTA)

Federal Unemployment Tax Act (FUTA)

Updated on:
August 22, 2022


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Table of Content

What is the Federal Unemployment Tax Act (FUTA)?

The Federal Unemployment Tax Act is a federal tax levied against all employers in the United States.

FUTA is a tax on the income earned from employment by employees. The tax is imposed on both the employer and the employee.

This tax is collected from employees by employers on a quarterly basis. Employers are required to remit payroll taxes to the IRS on a quarterly basis.

Most employers are required to pay FUTA taxes. Specific requirements dictate that an employer must pay this tax if they paid wages of $1,500 or more during any calendar quarter, or if they had at least one employee for at least part of the day for 20 weeks or more within a calendar year period.

FUTA is an indirect income tax that was first enacted in 1935. This tax is levied on the income of employees. The tax is imposed on both the employer and the employee.

Are Nonprofits exempt from FUTA?

Certain nonprofits are exempt from FUTA, while others are required to pay the unemployment tax. Nonprofits that qualify as 501(c)(3) organizations are exempt from paying FUTA. These are usually public charities that give away funds directly to a cause like humanities, education, health services, religion, and more. An organization must apply for 501(c)(3) status and be granted the status legally through the IRS to be exempt from FUTA. All other nonprofit organizations must pay the FUTA tax.

The Federal Unemployment Tax Act (FUTA) is necessary in order to provide unemployment benefits to those who have lost their jobs. The tax is used to fund the unemployment insurance program, which gives financial assistance to those who are out of work. The tax is also used to help pay for job training programs, which can help individuals find new employment.