Rev. Rul. 75-87

Advice has been requested whether an employer is liable for the tax imposed by the Federal Unemployment Tax Act (chapter 23, subtitle C, Internal Revenue Code of 1954), with respect to wages paid for employment to individuals when the employer is exempt from making payments under the state unemployment compensation act or his employees are ineligible, pursuant to state law, for unemployment compensation benefits.

Section 3301 of the Federal Unemployment Tax Act provides, in part, that there is imposed on every employer, as defined in section 3306 thereof, an excise tax, with respect to having individuals in his employ, equal to a stated percentage of the total wages paid by him during the calendar year with respect to employment.

Section 3306(a) of the Act defines the term "employer" as any person who during any calendar quarter in the calendar year or preceding calendar year paid wages of $1,500 or more, or on each of some 20 days during the calendar year or during the preceding calendar year, each day being in a different calendar week, employed at least one individual for some portion of the day.

The original counterpart of the Federal Unemployment Tax Act was enacted in 1935 as Title IX of the Social Security Act, Pub. L. No. 271, 74th Congress, (August 14, 1935). The purpose of this Act is expressed in S. Rep. No. 628, 74th Cong., 1st Sess. 12 (1935), as follows:

This bill does not set up a Federal unemployment compensation system. What it seeks to do is merely to make it possible for the States to establish unemployment compensation systems and to stimulate them to do so. This objective is carried out through grants-in-aid to the States (in title III) for the administration of unemployment compensation laws and through the imposition of a uniform pay-roll tax on employers (in title IX) against which a credit it allowed for contributions made by them to unemployment compensation funds set up pursuant to State law.

In H.R. Rep. No. 651, 74th Cong., 1st Sess. 9 (1935), the following comments are made:

Yet the Federal Government, under this bill, has important functions to perform in order to make it possible for the States to have unemployment insurance laws and to facilitate their operation. It equalizes competitive conditions through the imposition of the employment excise tax provided for in title IX. * * * In title III financial aid is given the States by the Federal Government to defray their costs in administering unemployment insurance. * * *

Title IX was, therefore, intended to encourage the states to enact their own unemployment compensation laws. It imposed a tax on employers but contained no provisions for the payment of benefits to the unemployed. However, it did provide that employers would be allowed specific credits for payments made under state unemployment compensation laws. Substantially similar provisions are found in the Federal Unemployment Tax Act. Within a short time of the enactment of Title IX, all states had enacted unemployment compensation laws.

Thus, there are two unemployment "taxes" imposed on employers. One is a contribution imposed under a state unemployment compensation law and the other is the tax imposed by the Federal Unemployment Tax Act. The state unemployment contributions are used exclusively for the payment of unemployment compensation benefits pursuant to the terms, definitions, and conditions of the state law, while the tax under the Federal Act is used for the payment of state and Federal expenses incurred in administering the unemployment compensation. Except for certain standards that are necessary to assure that state unemployment laws are genuine unemployment acts for purposes of qualifying for the credit provisions of the Federal Act, the states are free to set up their own systems without direction from the Federal Government.

Therefore, even if an employer, by reason of a state experience or merit rating system is not required to make contributions under a state unemployment compensation law, or under state law his employees are ineligible to receive benefits, he is nevertheless liable for the tax imposed by the Federal Unemployment Tax Act.