The Federal Unemployment Tax is a tax incurred by employers. The taxes are used in order to fund agencies that work on behalf of the workforce. In order to report these taxes, the employer submits a Form 940 to the Internal Revenue Service each year. Under some circumstances, they employer may be required to pay for the tax in payments that are spread throughout the year, rather than as a lump sum payment.
The Federal Unemployment Tax is used in order to pay for unemployment insurance for those who are unable to find work. It is also used to pay for half of the cost of unemployment benefits. If the states need to borrow money in order to pay unemployment benefits, the federal government uses the Federal Unemployment Tax to provide the money that the states borrow.
For each worker, the tax is 6.2 percent for the first $7,000 earned each year. Once the employee has earned $7,000, the employer is no longer required to pay any unemployment taxes on the worker. The situation is not always this simple, however. There are various tax credits available that an employer may be able to take advantage of. If all of these tax credits are taken advantage of, the effective rate can be reduced down to as little as 0.8 percent.
There are several types of wages that are exempt from the unemployment tax. First off, if the services are not performed on United States soil, the wages are not subject to the unemployment tax. In cases where an employee earns money after they have died, the funds that are given to the employee's estate are not subject to the unemployment tax. In the case of a child under the age of 21, any wages that are paid from a parent to a child, or vice versa, are exempt from the tax as well. This is equally true of wages paid from one spouse to another. If the wages come from an international organization of a foreign government, they do not need to pay the unemployment tax. This is also true of any United States governmental agency.
If a hospital pays its interns, they do not have to pay unemployment taxes on these wages. Newspaper distributors who are under the age of 18 do not need to have their employers pay an unemployment tax. If a school pays a student of the school, they are also exempt. Finally, non-profit organizations are exempt from this tax.