The Federal Unemployment Tax Act (FUTA) was enacted in 1935 in order to tax business owners' payroll and secure a source of revenue to fund state unemployment benefits. The revenue raised from the FUTA tax is deposited in a special Federal Unemployment Trust Fund, which is then distributed back to the states to help pay benefits to individuals were unemployed.

Until 2018, the FUTA tax rate has been 6.0% of the first $70000 of employees’ wages. Currently, the rate has decreased to 0.6%, but employers need to pay the tax unless they receive a federal tax credit up to 5.4%. This tax credit can be used to offset the FUTA payments if the employer has paid the required State Unemployment Insurance (SUTA) tax.

The payroll tax imposed by FUTA is paid only by employers — not their employees — and is used to fund the federal unemployment insurance system. This system was designed to provide financial aid for unemployed workers who have faced job losses due to no fault of their own and to stimulate the economy in times of need.

FUTA is also different from FICA (Federal Insurance Contributions Act), which requires both employers and employees to pay a payroll tax and is used to fund the Social Security program.

Overall, the FUTA tax is a vital source of revenue to fund the federal unemployment insurance system. It is an important tool to help those who have lost their jobs due to no fault of their own and to stimulate the economy during economic downturns. By paying their FUTA taxes, employers help to ensure that the unemployment benefits are adequately funded and that these benefits are made available to those in need.