The Federal Unemployment Tax Act (FUTA) requires most employers to pay unemployment insurance for their employees. The tax is based on the salaries, wages, commissions, fees, bonuses, vacation allowances and other benefits paid to full-time, part-time or temporary employees. In 2011, the tax was 5.4 percent of the first $7,000 in employee compensation. Employees do not pay anything for unemployment coverage.
Wages you pay to your spouse, parents or children under 21 are exempt from unemployment taxes. Payments made to workers who are considered statutory employees and certain fishing boat crew members also are not subject to unemployment taxes. You also do not have to pay unemployment taxes to domestic workers if you did not pay more than $1,000 in cash wages to all your domestic workers in any calendar quarter of the current or prior year. Tips of $20 or more in a month that are reported to you must be counted as wages when calculating unemployment taxes.
You also do not have to pay unemployment taxes on farm worker wages unless you either paid at least $20,000 in farm worker wages during any calendar quarter of the current or prior year; or you employed 10 or more farm worker during one day in 20 different weeks of the current year or prior year. You do not have to pay unemployment taxes on wages you pay to aliens on temporary work visas, but you must include their wages and work when determining if you are exempt from paying any unemployment taxes.
Some fringe benefits must be included when you are adding up the amount of compensation you gave each employee. You must count sick pay benefits, adoption assistance benefits and the value of goods, lodging, food, clothing and other non-cash benefits that are part of the employee's compensation. You do not have to count health insurance payments, child-care assistance, employer reimbursement for qualified moving benefits and employer contributions to Section 125 "cafeteria plans."
Do not count employer contributions to qualified retirement plan and 401(k) plans. However, you should count employee contributions to these plans.