⬤ Payroll Tax · Employer Guide

FUTA Tax, explained for employers

A small, capped, employer-only tax that funds the unemployment safety net and one of the easiest payroll obligations to quietly get wrong. Here is who pays it, how the math works, and where the deadlines and traps sit.

Employer's Annual Return

Form 940 — Federal Unemployment (FUTA) Tax

DUE
JAN 31

Wage base First $7,000 / employee

Headline rate 6.0%

SUTA credit Up to 5.4%

Effective rate 0.6%

~$42

Max / employee / yr

$500

Deposit threshold

What FUTA actually is

FUTA the Federal Unemployment Tax Act is a federal payroll tax that employers pay to help fund the nation’s unemployment insurance system. When a worker loses a job through no fault of their own, the benefits that tide them over are funded by a federal-and-state partnership. FUTA is the federal half of that partnership.

Two features define it, and both surprise people who are used to thinking about income tax:

It is paid entirely by the employer. Nothing is withheld from an employee’s paycheck for FUTA. It does not reduce anyone’s take-home pay it is a cost the business bears directly.
It is capped at a low wage base. FUTA applies only to the first $7,000 of wages you pay each employee in a calendar year. Once a worker crosses $7,000, you owe no further FUTA on that person for the rest of the year, no matter how much more they earn.

The federal government collects FUTA, pools it, and uses it to support state unemployment programs covering administrative costs and lending to states whose unemployment funds run dry during downturns. In short, FUTA is an employer-funded safety net: a small, capped tax that keeps the unemployment system solvent across the whole country.

FUTA vs. SUTA: the two halves of unemployment funding

Unemployment insurance is funded by two taxes that work as a pair, and they are easy to confuse because they do the same job at different levels of government.

FUTA		SUTA / SUI
Level	Federal	State
Collected by	The IRS	Each state's workforce agency
Who pays	Employer only	Usually employer only (a few states also tax employees)
Rate	One federal rate, same nationwide	Varies by state and by your claims history (experience rating)
Reported on	Form 940 (annual)	State returns (usually quarterly)

The two are linked by design. Paying your SUTA on time and in full is what earns you the large FUTA credit described later so the federal tax effectively rewards good standing with your state. Almost every employer owes both; they are not alternatives.

Who pays FUTA - and the three coverage tests

FUTA is an employer tax, full stop. Employees never pay it, and the self employed do not pay it on their own earnings a partner’s share of partnership profit is not subject to FUTA, and payments to genuine independent contractors are outside it too. The question, then, is whether your business is an “employer” for FUTA purposes. The IRS uses three tests, and meeting any one of them brings you in.

The general test. This catches most businesses. You owe FUTA if you paid $1,500 or more in wages in any single calendar quarter, or if you had at least one employee for some part of a day in 20 or more different weeks during the year.
The household-employee test. If you employ household workers a nanny, a caregiver, a housekeeper you owe FUTA once you pay $1,000 or more in cash wages in any calendar quarter.
The farmworker test. Agricultural employers owe FUTA if they paid $20,000 or more in cash wages to farmworkers in any calendar quarter, or employed 10 or more farmworkers for part of a day across 20 different weeks in the year.

A quick illustration. Say you run a small studio and hire two employees in March, paying out $9,000 in wages that quarter. You have cleared the $1,500 general-test threshold, so you are a FUTA employer for the year and you will file Form 940 the following January. The thresholds are doorways: cross one, and the obligation begins.

Quick illustration

Who is exempt from FUTA

Some employers and some payments fall outside FUTA entirely. The common exemptions:

501(c)(3) nonprofits. Organizations with federal tax-exempt status under section 501(c)(3) are not subject to FUTA, which sweeps most charities out automatically.
Government entities. Federal, state, and local government employers are generally exempt.
Employers below the thresholds. If you never meet any of the three coverage tests for instance, paying under $1,500 in every quarter and never reaching the 20-week mark FUTA does not apply.
Certain payments. Specific categories of compensation are excluded from FUTA wages, and certain workers (such as some family members in a family business) may not count.

Exemptions are narrower than they look, and the rules around nonprofits, government work, and family employment have their own wrinkles. When in doubt, confirm your status before you assume you are outside the system an incorrect exemption is expensive to unwind.

The FUTA rate, the wage base, and the 5.4% credit

Here is where the small-tax reputation is earned. The headline FUTA rate is 6.0%, applied to the first $7,000 of each employee’s wages. On its own, that would be up to $420 per employee per year. But almost no employer pays the full 6.0%.

The catch in the employer’s favor is the FUTA credit. If you pay your state unemployment tax (SUTA) on time and in full, you earn a credit of up to 5.4% against the federal rate. That drops the effective FUTA rate to 0.6%, or a maximum of about $42 per employee per year.

Holding	Ticker	Shares
Headline rate (no credit)	6.0%	about $420
Full credit (SUTA paid on time)	0.6%	about $42

So the same tax can be ten times larger or smaller depending on one thing: whether your state unemployment payments are current. That is why FUTA and SUTA discipline go hand in hand falling behind on the state tax quietly inflates the federal one. The 6.0% rate and the $7,000 wage base have both been stable for a long time; the wage base in particular can only be changed by an act of Congress, so treat these figures as durable but always confirm the current year’s numbers on IRS.gov before you file.

Credit-reduction states: when the discount shrinks

There is one situation where employers lose part of the 5.4% credit through no fault of their own. When a state borrows from the federal government to keep paying unemployment benefits usually after a recession drains its fund and does not repay the loan within the allowed window, that state becomes a credit-reduction state.

Employers in a credit-reduction state see their FUTA credit cut, which raises their effective FUTA rate above the usual 0.6%. The reduction typically grows for each additional year the loan stays unpaid. The Department of Labor publishes the list of affected states each year, so the practical step is simple: check whether your state is on that list before you calculate your year-end FUTA, because being in one quietly increases what you owe per employee.

A practical example

Say your business has 10 employees, each earning above $7,000, giving you a FUTA wage base of $70,000. In a normal state, your FUTA is $70,000 × 0.6% = $420 for the year. Now suppose your state is in its second year as a credit-reduction state, with a 0.6% reduction to the credit. Your effective rate rises from 0.6% to 1.2%, and the same $70,000 base now produces $70,000 × 1.2% = $840 - double the bill, for an extra $42 per employee, even though nothing about your own payroll changed.

How to calculate your FUTA liability

The calculation is short once you know the moving parts. Work it employee by employee:

Take each employee’s wages, but only count the first $7,000. Anyone who earns $7,000 or more contributes exactly $7,000 to the FUTA base; anyone earning less contributes their actual wages.
Add those capped amounts across all employees to get your total FUTA wage base.
Apply the effective rate. If your SUTA is current and your state is not credit-reduced, that is 0.6%. (To see the gross figure before the credit, apply 6.0%.)

A worked example

Part-year and lower-paid workers simply cap out lower. An employee who earned only $5,000 all year contributes $5,000 to the base, not $7,000 so their FUTA is $5,000 × 0.006 = $30.

A real-world mix. Most payrolls are not uniform. Picture a small café with five people on the books for the year a full-time manager, two full-time staff, and two part-timers. Here is how the FUTA base and tax fall out at the effective 0.6% rate:

Worker	Annual wages	FUTA wage base (first $7,000)	FUTA at 0.6%
Manager (full-time)	$52,000	$7,000	$42.00
Cook (full-time)	$38,000	$7,000	$42.00
Server (full-time)	$24.00	$7,000	$42.00
Part-timer A	$6,200	$6,200	$37.20
Part-timer B (left mid-year)	$3,000	$3,000	$18.00
Total	$123,200	$30,200	$181.20

Two things stand out. The café paid $123,200 in total wages, but only $30,200 of it was subject to FUTA because the three higher earners each cap at $7,000 while the two part-timers fall under the cap. And the total FUTA for the whole year comes to just $181.20. Since that figure never crosses the $500 deposit threshold, the café can simply pay it with its annual Form 940 rather than depositing during the year.

Depositing and reporting: the $500 rule and Form 940

FUTA has two separate obligations that people often merge in their minds: depositing the tax during the year, and reporting it once a year. They run on different clocks.

Depositing during the year the $500 rule

You track your FUTA liability as it accrues each quarter. The rule of thumb is simple: once your accumulated FUTA liability passes $500, you must make a deposit. If a quarter ends and you are still under $500, you carry the balance forward and combine it with the next quarter. If you never cross $500 all year, you can simply pay the whole amount when you file your annual return.

Quarter	Period covered	Deposit due by
Q1	January 1 - March 31	April 30
Q2	April 1 - June 30	July 31
Q3	July 1 - September 30	October 31
Q4	October 1 - December 31	January 31 (next year)

Deposits are made electronically through the federal payment system (EFTPS). When a due date lands on a weekend or holiday, it generally rolls to the next business day.

A practical example of the carry-forward

Imagine a growing firm that accrues FUTA gradually as it hires through the year:

Q1: $210 of FUTA accrues. That is under $500, so no deposit is due — the $210 carries forward.
Q2: $260 more accrues, bringing the running total to $470. Still under $500, so it carries forward again.
Q3: $190 more accrues, pushing the cumulative total to $660. Now it has crossed $500, so a deposit of the full $660 is due by October 31.
Q4: $120 more accrues. Because it is under $500 on its own and the year is ending, this final amount is simply paid with Form 940 by January 31.

The takeaway: you are not depositing every quarter automatically you deposit only in the quarter your running total first tops $500, and you clean up any small remainder at filing.

Reporting once a year - Form 940

FUTA is reported on Form 940, the Employer’s Annual Federal Unemployment Tax Return. You file one Form 940 for the whole year, and it is due by January 31 of the following year so 2025’s return is due January 31, 2026. Form 940 is where the credit and any credit-reduction adjustment are reconciled, and where any remaining balance under the $500 threshold is paid. The return can be mailed or e-filed, and special rules apply to agricultural employers.

Confirm the current thresholds, deposit rules, and filing dates on IRS.gov before you file the structure is stable, but it is worth a check each year.

FUTA vs. FICA: don't confuse the two

FUTA and FICA are both payroll taxes, but they fund different things and behave differently and mixing them up leads to real reporting errors.

FUTA - funds unemployment

FICA - funds Social Security & Medicare

The clearest distinction: FICA is shared and shows up on the employee’s pay stub; FUTA is the employer’s alone and never does.

Mistakes that cost employers money

01

Withholding FUTA from paychecks

FUTA is never withheld from employees. Deducting it from wages is both wrong and a payroll-compliance problem.

02

Forgetting the $7,000 cap

Applying FUTA to full wages instead of the first $7,000 dramatically overstates the tax and signals a payroll setup that needs review.

03

Losing the credit by paying SUTA late

A late or missed state unemployment payment can cost you part of the 5.4% credit, multiplying your federal FUTA bill.

04

Ignoring credit-reduction status

Employers in a credit-reduction state who calculate at the standard 0.6% will under-deposit and owe a true-up at filing.

05

Misclassifying workers

Treating an employee as a contractor to avoid FUTA is a frequent audit trigger with penalties well beyond the tax saved.

06

Missing the $500 deposit trigger

Waiting until Form 940 when liability has already crossed $500 mid-year invites late-deposit penalties.

Filing on time and calculating on the right base is always cheaper than the alternative.

Frequently asked questions

Do employees pay any part of FUTA?

No. FUTA is paid entirely by the employer. Nothing is withheld from employee wages, and it does not reduce anyone’s take-home pay. It is an employer-only tax that funds the unemployment system.

What is the FUTA rate, and why do most employers pay so little?

The headline rate is 6.0% on the first $7,000 of each employee’s wages. Most employers, however, earn a credit of up to 5.4% for paying their state unemployment tax on time, which lowers the effective rate to about 0.6% roughly $42 per employee per year.

What is a credit-reduction state?

A state that borrowed from the federal government to pay unemployment benefits and has not repaid the loan in time. Employers in that state lose part of the 5.4% credit, so their effective FUTA rate is higher than the usual 0.6%. The Department of Labor publishes the list each year.

When do I have to deposit FUTA versus just pay it at filing?

Track your liability as it builds. Once it passes $500 in accumulated tax, you must deposit by the end of the month after that quarter. If you never cross $500 for the year, you can pay the whole balance with your annual Form 940.

Which form reports FUTA?

Form 940, the Employer’s Annual Federal Unemployment Tax Return, filed once a year by January 31 for the prior year. It reconciles the credit and any credit-reduction adjustment.

Does the self-employed person pay FUTA?

No. FUTA does not apply to a sole proprietor’s or partner’s own earnings, and payments to genuine independent contractors are outside it. It applies to wages paid to employees.

Is FUTA the same as the unemployment benefits a worker receives?

No. FUTA is the employer tax that helps fund the system; unemployment insurance is the benefit a laid-off worker collects. The tax pays into the program; the benefit pays out of it.

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