futa
Definition
FUTA stands for the Federal Unemployment Tax Act, which requires employers to pay a federal tax that funds unemployment benefits for workers who lose their jobs. The IRS collects this tax from businesses, and the money goes into a fund that states draw from to pay out unemployment claims. You pay this tax on your own as the employer, meaning you cannot deduct it from your employees' paychecks.
Example
If you run a small bakery with three employees, you are responsible for paying FUTA taxes on the wages you pay them each year, separate from any payroll taxes your employees themselves owe.
Watch Out
Many small business owners confuse FUTA with SUTA, which is the similar unemployment tax your state charges, and you are typically responsible for paying both.
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This definition is for informational purposes only and does not constitute legal advice. Please consult with a licensed attorney for legal guidance.