What is the Federal Unemployment Tax Act (FUTA)?

The Federal Unemployment Tax Act provides payments of unemployment compensation to workers who have lost their job, according to the IRS. Under the Act, employers pay both a federal and state unemployment tax; they are not deducted from employee wages.

FUTA covers a federal share of state administration costs for job service and unemployment insurance programs and pays one-half of extended unemployment benefit costs. Federal unemployment taxes are owed by employers who pay at least $1,500 in wages during any calendar quarter, cites Intuit. As of January 2015, the current FUTA rate is 6.0 percent; employers may take a credit up to 5.4 percent of taxable income if they pay state unemployment taxes.