TABLE OF CONTENTS Employment taxes are one type of payroll tax that can be important in state and local tax planning. Wage withholding is the largest. The major employment taxes paid by the employer at the Federal level are Social Security taxes. These come in two parts, one that finances old age and disability benefits at 6.2% up to a maximum indexed by inflation (for 2002, $84,500) and the other that finances Medicare at 1.45% of compensation. In addition to these taxes, employers are subject to a Federal unemployment tax (also called FUTA) of 6.2% on the first $7,000 of compensation paid to an employee.
Unemployment taxes are used to fund unemployment insurance. Unemployment insurance is a Federal and state program established to provide unemployment benefits to qualifying employees when employment is terminated. State unemployment benefits are governed under both Federal and state law. Unemployment insurance is funded almost entirely by direct taxes levied on employers.
Under FUTA, the Federal government has provided some uniformity for the various state unemployment laws. However, state unemployment programs still are administered under state law. State law prescribes the tax structure, qualifications, limitations, and benefit requirements. While this module describes the general concepts under unemployment tax law, it is very important to review the individual state tax laws to determine each state's applicable rules. Even seemingly minor differences can be important.
Unemployment tax rates are applied to a wide base, which varies by state. The rates also vary by employer. The state...
