An employer is required to pay a portion of Social Security and Medicare taxes. Likewise, the employer is required to pay unemployment tax. The unemployment tax is partially based on employees’ salaries. Most employers pay both a federal and state unemployment tax. Each state sets its own unemployment tax rate. The good news for companies is they get a credit toward the federal amount based on the amount paid to the state. In essence, the amount owed in state unemployment taxes is subtracted from what is owed in federal unemployment tax.Your state unemployment office can help you gain a better understanding of how the unemployment tax in calculated in your state.
Unlike the other taxes, only the employer pays the unemployment tax. A portion is not deducted from the employee’s salary. The taxes paid get deposited into an unemployment fund known as the Federal Unemployment Tax Act (FUTA). This accumulated fund then provides unemployment compensation to worker’s who have lost their jobs.
Use Form 940 to report FUTA tax.
There are rules and exemptions for employees that fall under special employment classifications. Be sure to be current with the IRS’ specifications.