CSLB Contractor's Law & Business Practice Exam

What occurs after an employee's taxable wages exceed $7,000?

1. The employer pays additional FUTA

2. The employer does not pay FUTA

3. The employee pays higher taxes

4. No changes occur in taxation

The correct answer is: The employer does not pay FUTA

When an employee's taxable wages exceed $7,000, it is significant because the Federal Unemployment Tax Act (FUTA) imposes a tax only on the first $7,000 of an employee's wages. Once an employee’s wages exceed this threshold within a calendar year, the employer is no longer required to pay FUTA on wages paid to that employee. This means that after the $7,000 limit is reached, the employer's obligation to contribute to FUTA for that particular employee ceases, resulting in the employer not paying additional FUTA on any wages beyond that amount. Therefore, this reflects the nature of FUTA as a wage-based tax with a cap on the taxable earnings for unemployment tax purposes. In contrast, the other options do not accurately describe the tax implications of exceeding the $7,000 threshold. Additional FUTA cannot be applied once the cap is reached, the employee's tax situation does not change in terms of FUTA liability beyond the threshold, and there are indeed changes in taxation because the employer's responsibility ceases for any wages paid after the limit.