Final answer:
Employers are required to pay FUTA tax on the first $7000 of an employee's income annually when total wages exceed $1500 in any quarter. This federal tax, complemented by state-level taxes, funds unemployment benefits. States have the option to set higher wage bases for their unemployment tax collections.
Step-by-step explanation:
An employer must pay the FUTA tax, which is a federal tax collected from employers on up to the first $7000 of an employee's income for a year. This requirement kicks in if employees' wages total more than $1500 in any quarter. The FUTA tax, alongside state unemployment taxes, funds unemployment benefits. For historical context, the significance of payroll taxes was underscored by the Revenue Act of 1942, which mandated employers to withhold taxes from each employee's paycheck and led to a dramatic increase in the number of Americans paying federal taxes.
FUTA taxes are calculated on a federal level, but states have the autonomy to set higher wage limits for their unemployment insurance tax purposes. In fact, 41 states have chosen a higher base than the federal $7,000 wage limit. These state-level decisions can impact the funding of unemployment benefits, which on average amount to about one-third of the wage the person earned in their previous job, although the level of unemployment benefits can vary notably across different states.