Utah Contractor Practice Exam

Which of the following is true about FUTA tax?

1. It is applicable to all employees

2. It has a limit on taxable income

3. It supports unemployment compensation

4. It is deducted from employee's wages

The correct answer is: It supports unemployment compensation

The chosen answer accurately reflects the purpose of the Federal Unemployment Tax Act (FUTA) tax. FUTA tax is primarily designed to fund unemployment compensation programs at the federal and state levels. This tax is collected from employers and is critical for providing benefits to workers who have lost their jobs through no fault of their own. The funds generated from this tax help support state unemployment insurance programs, ensuring that individuals receive assistance during periods of unemployment. Other options address different aspects of FUTA tax but do not accurately convey its primary purpose. For instance, while it is true that FUTA tax does not apply to all employees—certain types of employment may be exempt or receive a different treatment—it is specifically aimed at employer contributions rather than being a burden on employee wages. Additionally, regarding the limit on taxable income, while there is a wage base limit for FUTA calculations, this would not capture the essence of what FUTA tax is fundamentally about. Lastly, FUTA tax is not deducted from employee wages; instead, it is an employer tax. Thus, option C succinctly identifies the correct focus of the FUTA tax's function within the broader context of employment and economic support systems.