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.
Tips: Unemployment Insurance (UI) is a government program that gives temporary financial support to eligible workers who lose their jobs (no fault of their own).
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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.
Note: FUTA tax doesn't apply to employers in American Samoa, Guam, and the CNMI, but it does apply to employers in the USVI and Puerto Rico.
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.
Note: Need help with filing Form 940? Check out our detailed
Form 940 instructions for step-by-step guidance.
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).
| Reporting Period | Due Date |
|---|
| Quarter 1 | April 30* |
| Quarter 2 | July 31* |
| Quarter 3 | October 31* |
| Quarter 4 | January 31* |
*If there is a federal holiday or weekend, the next business day will be considered.
How to Calculate FUTA Tax?
- To calculate FUTA tax, determine the first $7,000 from employee wages paid in a calendar year.
- Multiply that amount by 6.0%.
- Apply the state unemployment tax credit (up to 5.4%) to reduce your federal tax liability.
Example 1:
Three employees each earn $10,000. Employer is eligible for a full 5.4% credit. Calculate the FUTA.
Calculation:
Now, the FUTA rate is 0.6%
$7,000 × 0.006 = $42
Total FUTA = $42 × 3 = $126
Tips: If the employee doesn’t have any credits, the maximum tax is $7000 x 6% = $420.
Example 2:
Let us consider an employee who earns $4,000 and qualifies for full credit (0.6%). Calculate the FUTA.
Calculation:
$4,000 × 0.006 = $24
Here, the employee earns less than $7000, so the entire earnings will be subject to FUTA tax.
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:
| Feature | FUTA | FICA |
|---|
| Purpose | Funds unemployment benefits | Funds Social Security and Medicare programs |
| Who Pays | Employer only | Both Employer and Employee |
| Applicable Wage Base | First $7,000 of each employee’s wages per year | Social Security: up to $168,600 Medicare: no limit |
| Tax Rate | 6.0% (can be reduced to 0.6% with SUTA credit) | 6.2% for Social Security + 1.45% for Medicare (each for employer and employee) |
| Form Used | Form 940 (annual) | Form 941 (quarterly) |
| Deposit Requirement | Quarterly if over $500 | Usually semi-weekly or monthly, depending on payroll size |
| Employee Deduction | No, not deducted from employees | Yes, deducted from employee wages |
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:
| Feature | FUTA | SUTA |
|---|
| Level of Tax | Federal | State |
| Purpose | Supports federal unemployment programs and provides aid to states | Funds state unemployment benefits directly |
| Who Pays | Employers only | Employers (in most states); States like Alaska, New Jersey, and Pennsylvania require employee contributions too |
| Tax Rate | 6.0% (standard), usually reduced to 0.6% with SUTA credit | Varies by state and employer experience |
| Wage Base | First $7,000 of each employee’s wages | Varies by state (e.g., $7,000 to $72,800) |
| Form Used | Form 940 (filed annually with IRS) | State-specific forms (filed quarterly or as required by the state) |
| Deposit Frequency | Quarterly if liability > $500 | Varies by state (monthly, quarterly, etc.) |
| Credit Impact | Employers can get up to 5.4% credit for timely SUTA payments which helps to lower FUTA tax | No credit applies to SUTA |
The information provided is based on guidelines from the IRS website. For more information, check the 2025
Publication 15, and
TC759 
