Essay on Futa: Taxation and Payroll Tax

Federal Unemployment Tax Act
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Abstract
The paper discusses the payroll taxes and Federal Unemployment Tax Act in particular. This tax is paid by the employer in order to provide the workers with compensation in case of job losing. The paper discusses the reason of its implementation, its effectiveness and changes.
Keywords: FUTA, payroll tax

Payroll tax is a tax, which is paid by the employer and, some cases, by employee. This notion appeared in 1930s. This tax is imposed on wages; however, it is different from income tax. The thing is that the employee pays half of this tax, and the employer pays another half. The employee’s share is taken directly out of his paycheck. It is worth mentioning that these taxes are not deductible on federal income returns. It means that the employees are taxes twice on the same earning (Murphy and Higgins, 2012, p. 12) or, as it is logically understandable, employees are taxed on money which they have never received. Payroll taxes are Social security tax, Medicare tax, Federal unemployment tax, and State unemployment tax. The largest payroll taxes include Social Security and Medicare taxes. It should be noted that these are those types of takes, which are divided between the employer and employee. And they turn out to be a high burden for the workers, as ordinary middle-income families turn out to be subject to the highest marginal federal tax rates (Anderson, 2012, p.400). o When and why payroll tax was introduced
Federal Unemployment Tax is a federal tax, which is paid by the employers in order to provide with compensation those employees, who have lost their jobs. It was introduced in 1938 and starting from this year and till 1960, this payroll tax was 3.0% of the employer’s taxable payroll (Daniels, 2010, p. 93). The government obtained the net tax of 0,3% in order to be able to finance state and federal administrative costs according to the provisions of the Federal Unemployment Tax Act. This act allowed the employers a 90% credit against the federal tax, which could assist them to pay the state unemployment insurance taxes. In 1985, the Federal unemployment tax rate increased to 6.2%. When this tax was introduced, it was rather efficient during the period of Great Depression, as it helped those people, who could not find the job and lived under the poverty line. At that time, Franklin Delano Roosevelt thoroughly investigated the issue of unemployment insurance. However, at that time the policymakers were under influence of John Maynard Keynes, who argued that the government could stop the decline by increasing its own spending or introducing the tax cuts. For that reason, Congress did not want to establish a national insurance program. In order to force them FUTA established special system, which was administered by the federal and state government. And just in 1937, the government constitutionally upheld the federal unemployment insurance tax scheme. o Effectiveness
While discussing the effectiveness of this payroll tax, it is worth mentioning that it is effective for the employees, because it helps them to be compensated in the form that provides the highest after-tax value. What concerns businesses and employers, is that, in most cases, they prefer to pay the fringe benefit, which is not subject to FUTA tax. In general, it might be assumed that the cost is worth the obtained benefits, as it helps the employees to get more money. o Changes
The main changes concern the unemployment tax rate. At first it was 3% and that changed to 6,2%. Also, in 2002, the government has passed one more acts (Temporary Extended Unemployment Compensation Act), aimed at assisting those people, who have exhausted their state unemployment compensation benefits. It means that when people stop receiving money under FUTA, they may apply for additional 13 week

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