Federal Unemployment Tax Act of 1935

FUTA Purpose

Today's Unemployment Insurance (UI) program, directed by the U.S. Department of Labor and administered individually by states, retains as its guiding principal the idea that workers who lose their jobs through no fault of their own should not become homeless, hungry and destitute. The idea of a social safety net to assist out-of-work people while they search for employment remains the heart of FUTA. The fundamental mechanism employed to fund the program -- namely, taxing employers through a federal unemployment tax -- still exists today. FUTA was implemented in 1939, establishing the joint state-federal program in place today.

FUTA economic principles are simple. During good economic times, tax revenues increase and the FUTA fund grows due to under-utilization. During slowdowns or recessions, the fund is accessed to pay unemployed workers. FUTA not only assists out-of-work people with the necessities of life, it also acts as an economic stabilizer. This is accomplished via a federal tax levied on employers at a current rate of 6.2 percent of each employee's first $7,000 in earnings. This 6.2 percent rate is offset through a state tax credit. Each state that has its own unemployment programs that meet federal approval -- and all states meet such criteria as of 2011 -- may allow employers a 5.4 percent credit against the 6.2 federal rate, effectively making the federal rate 0.8 percent. This 0.8 percent paid to the federal government finances FUTA's administrative costs and half the cost of the federal-state extended benefits (EB) program. The taxable wage base was established at $3,000 in 1939, with an effective federal tax rate (after state credits) on employers of 0.3 percent. These figures have changed over the years.

The extended benefits (EB) program was added to FUTA in 1970 and revised significantly in 1981. The EB program provides extended unemployment benefits -- 13 to 20 weeks -- to jobless workers in states where unemployment is dramatically high. In times of national crisis, the federal government may authorize EB payments to all states, as it did in March 2002 with the Temporary Emergency Unemployment Compensation program. States that experience insolvent unemployment programs can receive federal loans from the FUTA fund. During extreme emergencies, such as during 2009 and 2010, the federal government may extend unemployment benefits further, but not through the FUTA EB program. Programs such as the Emergency Unemployment Compensation program will extend benefits for many jobless workers to 99 weeks through 2011.

The original 1939 federal employer tax rate was 0.3 (after state tax credits, compared to today's effective 0.8 percent rate). The 0.8 percent rate, which took effect in 1983, includes a 0.2 percent surtax, which Congress legislated in 1976. The original wage base was $3,000 in 1939. It was raised in 1972 to $4,200, to $6,000 in 1978, and to the current base of $7,000 in 1983. States may be penalized by the federal government if they receive a loan via FUTA funds and fail to repay the loan in a timely fashion. At the end of 2010, three states -- Indiana, Michigan and South Carolina -- were on the hook to the federal government for FUTA loans taken to avoid state unemployment insolvency. This results in a federal tax-credit reduction of 0.3 percent per year, meaning that employers in those states pay an effective FUTA tax of 1.1 percent, not 0.8 percent.