Understanding the Federal Unemployment
Tax Act (FUTA)

The Federal Unemployment Tax Act is a key part of the U.S. payroll tax system. It requires employers to pay taxes that fund unemployment benefits for workers who lose their jobs. Unlike Social Security and Medicare taxes, only employers are responsible for paying FUTA; employees do not contribute to it.

Whether you are a business owner or payroll manager, understanding FUTA tax is essential for ensuring compliance and avoiding penalties.

What is FUTA Tax?

• FUTA is also known as the Federal Unemployment Tax Act. It is a U.S. federal law that requires employers to pay a payroll tax (unemployment tax). These taxes are used to fund unemployment compensation programs for workers who have lost their jobs.
• FUTA tax is paid only by employers, not by employees. It supports the federal government's oversight and administration of state unemployment insurance (UI) programs.

Who pays FUTA Tax?

These are the criteria used to determine whether an employer is required to pay FUTA tax,

For Regular Employers:

• If you paid $1,500 or more in wages for any calendar quarter this year or last year.

(or)

• You had at least one employee work some part of a day in 20 or more different weeks (includes full-time, part-time, and temporary employees) during the year.

For Household Employers:

• If you paid a wage of $1,000 or more to household employees in any calendar quarter of this year or previous year.

For Agricultural Employers:

• If you paid a wage of $20,000 or more in cash for any calendar quarter.

(or)

• If you employed 10 or more farmworkers (full-time, part-time, or seasonal) on any day for 20 or more different weeks during this year or previous year.

FUTA Tax Rate and Wage limit

• The Standard FUTA tax rate is 6.0%
• The Taxable wage limit is $7,000 per employee annually. This means you only pay FUTA tax on the first $7,000 of each employee’s wages annually.
• Employers may be eligible for a FUTA tax credit of up to 5.4% if they pay their State Unemployment Tax (SUTA) in full and on time as long as their state is not classified as a credit reduction state.

Filing FUTA: Form 940

You must file IRS Form 940 annually to report your FUTA tax. The deadline to file with the IRS is January 31. You can e-file Form 940 easily using TaxZerone.

When should I deposit FUTA Tax?

• FUTA tax must be deposited every quarter, if your tax liability is more than $500 in a quarter.
• If it is $500 or less, you can forward it over to the next quarter.
• FUTA tax can be deposited through the EFTPS (Electronic Federal Tax Payment System).

How to Calculate FUTA Tax?

1. To calculate FUTA tax, determine the first $7,000 from employee wages paid in a calendar year.
2. Multiply that amount by 6.0%.
3. Apply the state unemployment tax credit (up to 5.4%) to reduce your federal tax liability.

Why does FUTA compliance matter?

FUTA compliance is essential for:

• Staying in good standing with the IRS
• Ensuring employees can access unemployment benefits (if eligible)
• Avoiding penalties for late payments or non-filing.

FUTA vs FICA

FUTA and FICA are two important payroll taxes, but they serve very different purposes. FUTA funds unemployment benefits and is paid by employers only, while FICA supports Social Security and Medicare and is shared by both employers and employees. Here is a quick difference:

FUTA vs SUTA

Both FUTA and SUTA are unemployment taxes paid by employers. While FUTA is a federal tax, SUTA is a state-level tax. SUTA specifically used to fund unemployment benefits for workers who lose their jobs. Here is a quick difference: