The Federal Unemployment Tax Act was initially passed in 1939 it has remained ever since as the primary means of raising revenue which is then used to pay unemployment insurance benefits to qualified individuals throughout the United States. Some small businesses who believe they are exempt from having to pay unemployment taxes can sometimes find out after it is too late that they were responsible for paying the tax and now must pay applicable penalties, interest and fees because they did not properly comply with this important law. The funds generated by the unemployment tax are circulated to the various state department of unemployment offices to help with their expenses and payouts for their unemployment insurance programs.
In most cases, a typical employer will be responsible for paying a percentage of all employees salaries or paychecks to the federal government under this Tax Act. However, there are certain categories of employees who are exempt from these requirements.
Unemployment Tax Exemptions
Among the types of employees who do not obligate their employers to pay any unemployment taxes are the following:
- Income paid to individuals for a job that is conducted by the employee outside of the United States
- Income paid to individuals by a nonprofit organization
- Income paid to an estate of a now deceased employee if the income is paid at any time after the year that the employee died
- Income paid to an individual by a foreign government or certain organizations that are classified as “international organizations” (such as the United Nations)
- Income paid to individuals working as a hospital in turn
- Income paid to an individual working for a state, local or federal government within the United States
- Income paid by individual newspaper deliverers if those individuals are under the age of 18
- Income paid by a parent to a child if the child is less than 21 years old or by a child to a parent (regardless of the age of the child), or by one spouse to another
Unemployment Tax Rates
Although rates for unemployment taxes vary from time to time as Congress passes different pieces of legislation, the current version of the Federal Unemployment Tax Act levies a 6.2% tax. 6% of the current tax rate is considered “permanent” while the remaining 0.2% has been in existence since 1976 but is always been labeled “temporary”. Under current laws, the “temporary” rate will expire in June of 2011 unless Congress takes further action to extend this “temporary” tax increase.
Taxes For Receiving Unemployment Benefits
In addition to employers being responsible for unemployment taxes,individuals who have lost their jobs and successfully receive unemployment insurance compensation must also be aware that their benefits are considered “income” by the Internal Revenue Service (“IRS”). In other words, the answer to the question “Is Unemployment Taxable?” is yes! Be sure to report all unemployment income received on your 1040 or 1040 ez (each form has it’s own specific line item for unemployment compensation income) to avoid any penalties, interest or levies against you by the IRS.
Source: irs.gov/businesses/small/international/article/0,,id=104985,00.html and irs.gov/taxtopics/tc418.html