CSLB Law & Business ExamEmployment RequirementsHard
A California employer pays one employee $50,000 in wages during the year and has no federal credit reduction issues. Under the Federal Unemployment Tax Act (FUTA), the net effective rate is 0.6% on the first $7,000 of wages per employee. What is the employer's FUTA tax liability for this employee?
- A$300
- B$3,000
- C$420
- D$42
Show answer & explanationAnswer & explanation
Correct answer: D. $42
FUTA tax applies only to the first $7,000 of wages paid per employee annually. At the net rate of 0.6% (after the standard 5.4% state credit), the tax equals $7,000 x 0.006 = $42, regardless of the employee's total annual wages.
Why the other options are wrong
- A. This overstates the tax by using the wrong base or rate.
- B. This incorrectly applies the rate to the full $50,000 in wages.
- C. This applies the full 6.0% rate without the state credit.
FUTA Tax Wage Base
The Federal Unemployment Tax Act taxes only the first $7,000 of each employee's annual wages at a net rate of 0.6% for employers current on state unemployment taxes.
- Wage base capped at $7,000 per employee per year
- Net rate is 0.6% after the 5.4% state credit
- Paid entirely by the employer, not withheld from wages
Memory trick: FUTA stops counting after the first $7,000—like a tax speed bump.