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The Federal Unemployment Tax Act (FUTA), with state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs. Most employers pay both a federal and a state unemployment tax. Only the employer pays FUTA tax; it is not deducted from the employee's wages.
A state that has not repaid money it borrowed from the federal government is a “credit reduction state.” The Department of Labor determines these states. If an employer pays wages that are subject to the unemployment tax laws of a credit reduction state, the employer must pay additional federal unemployment tax when filing its Form 940. Certain exemptions apply, so a tax professional should be consulted if you have questions about your federal unemployment tax liabilty.