The Federal Unemployment Tax Act (FUTA) is a federal law that requires employers to contribute to a nationwide unemployment insurance program. FUTA taxes fund state unemployment benefits for workers who have lost their jobs through no fault of their own.
How much is FUTA tax?
The Federal Unemployment Tax Act (FUTA) places the responsibility of paying FUTA taxes on employers rather than employees. This is a key distinction from some other types of payroll taxes (which we’ll mention later) split between the employer and employee.
Under FUTA, you are liable for paying 6% of the first $7,000 in wages earned by each of your employees per calendar year.
However, you may be eligible for a FUTA tax credit of up to 5.4% , which significantly reduces your effective FUTA tax rate.
To qualify for the full credit, you must:
- Have paid their state unemployment (SUTA) taxes in full and on time. Delinquent SUTA payments will result in a reduced FUTA credit.
- Be located in a state that has an unemployment insurance program approved by the U.S. Department of Labor. All states currently have approved programs.
If you meet these criteria, your FUTA tax rate is reduced from the standard 6% down to just 0.6% (6% - 5.4% credit). This means the maximum FUTA tax you will pay per employee is most likely $420 per year ($7,000 wage base x 0.06 rate).
The FUTA tax credit provides a significant cost-saving opportunity for most employers. Just remember that proper and timely payment of state unemployment taxes is crucial to qualifying for the full 5.4% credit and minimizing FUTA tax liabilities.
Who pays FUTA taxes?
The FUTA tax applies to all private sector employers. Certain nonprofit organizations and government entities are also subject to FUTA. Specifically, the following employers must pay FUTA taxes:
- Private businesses of any size: If it paid at least $1,500 in wages during any calendar quarter in the current or previous year and had at least one employee for some part of a day in 20 or more different weeks during the current or previous year (all full-time, part-time, and temporary employees count!)
- Nonprofit organizations: If they’re not tax-exempt under section 501(c)(3) of the Internal Revenue Code
- Employers with household employees: If they paid cash wages of $1,000 or more in a calendar quarter to workers such as housekeepers or nannies
- Agricultural employers: If they paid cash wages of $20,000 or more in a calendar quarter or employ 10 or more workers for some part of a day in 20 or more weeks
That said, employers are solely responsible for calculating, reporting, and remitting FUTA taxes to the Internal Revenue Service (IRS) on a quarterly or annual basis—it cannot be deducted from an employee's paycheck.
If you fail to properly pay FUTA taxes, you risk costly penalties and interest charges. As such, understanding FUTA obligations is a crucial part of managing payroll taxes and maintaining compliance as a business owner or HR professional.
Who doesn’t pay FUTA taxes?
While the Federal Unemployment Tax Act (FUTA) requires most employers to pay FUTA taxes, there are some key exceptions and exemptions:
Agricultural employers: Agricultural (farm) employers are exempt from FUTA taxes if they paid less than $20,000 in cash wages to farmworkers in the previous calendar year. This exemption applies to small family farms and other agricultural operations that stay below the $20,000 threshold.
Household employers: Employers of household workers, such as nannies, housekeepers, or caregivers, are exempt from FUTA taxes if they paid less than $1,000 in cash wages to these employees in the previous calendar year. This helps household employers with minimal payroll avoid the FUTA tax requirements.
Tax-exempt organizations: Religious, charitable, educational, and other 501(c)(3) tax-exempt organizations are not required to pay the FUTA tax. This exemption applies to non-profit entities that have received exemption from federal income taxes.
Government employers: State and local government employers, including public schools and universities, are not subject to the FUTA tax. Their employees are covered under separate state unemployment insurance programs.
Non-employee workers: Individuals who are not classified as employees for FUTA purposes, such as independent contractors, sole proprietors, and partners in a partnership, do not have FUTA taxes paid on their behalf. The FUTA tax only applies to full-time/part-time employees.
How to calculate FUTA
As mentioned above, the FUTA tax is calculated as 6% of the first $7,000 in wages paid to each employee during the calendar year. This means the maximum FUTA tax per employee is $420 ($7,000 wage base x 0.06 rate).
Employers should carefully track each employee's total wages throughout the year. Once an employee has been paid more than $7,000, the employer can stop paying FUTA tax on that employee for the remainder of the year.
For example, if an employee is paid a total of $9,000 in the year, the employer would only need to pay FUTA tax on the first $7,000. No FUTA tax would be due on the additional $2,000 in employee wages.
When are FUTA taxes due?
FUTA taxes are due quarterly, with payments due by the last day of the month following the end of each calendar quarter. The specific due dates are:
- January 1 to March 31 (Q1) - Due April 30
- April 1 to June 30 (Q2) - Due July 31
- July 1 to September 30 (Q3) - Due October 31
- October 1 to December 31 (Q4) - Due January 31
Employers must also file an annual FUTA tax return—the IRS Form 940 (Employer's Annual Federal Unemployment (FUTA) Tax Return)—by January 31 of the following year. This annual filing reconciles the total FUTA tax liability for the year.
Employers who owe less than $500 in FUTA taxes for the year can pay the full amount when filing the annual Form 940. On the other hand, employers who owe $500 or more in FUTA taxes per quarter must make these quarterly payments.
It's crucial for employers to make FUTA tax payments on time, as late deposits can result in penalties and interest charges from the IRS. Staying on top of the FUTA filing and payment deadlines is an important part of maintaining payroll tax compliance.
FUTA vs. other payroll taxes
Understanding the distinctions between FUTA and other payroll taxes is crucial for employers to ensure proper compliance and management of their tax obligations. Let's take a closer look at the differences between FUTA and some of the other common payroll and employment taxes:
FUTA vs. SUTA
FUTA refers to the federal unemployment tax, while SUTA stands for the State Unemployment Tax Act.
- FUTA is a federal tax paid by employers to fund the nationwide unemployment insurance program.
- SUTA is the state-level unemployment tax that employers must pay to their respective state unemployment agencies.
- Employers are required to pay both FUTA and SUTA taxes, which together form the overall unemployment insurance system in the United States.
- The FUTA rate is 6% for everyone, while SUTA tax rates are determined by each individual state.
FUTA vs. FICA
FICA refers to the Federal Insurance Contributions Act, which encompasses the Social Security and Medicare payroll taxes.
- FUTA taxes are used to fund unemployment benefits, while FICA taxes support the Social Security and Medicare programs.
- FICA taxes are split between the employer and employee, with each paying 7.65%. FUTA is solely an employer-paid tax.
- The wage base for FICA taxes is higher than the $7,000 FUTA wage base.
FUTA vs. Unemployment Insurance (UI)
Unemployment Insurance (UI) refers to the overall system of unemployment compensation provided to eligible workers who have lost their jobs.
- FUTA and SUTA taxes fund the state-run UI programs that pay out benefits to unemployed individuals.
- UI benefits are administered and provided by state workforce agencies, not the federal government.
- The FUTA tax helps support the federal-state partnership that oversees the UI system nationwide.
Frequently asked questions about FUTA
How can employers make FUTA payments?
Employers have a few options when it comes to making their quarterly FUTA tax payments:
- Electronic Federal Tax Payment System (EFTPS): The preferred method for FUTA tax payments. Employers can schedule FUTA deposits electronically through the EFTPS system and make payments online, by phone, or through a financial institution.
- Paper check: Employers can also pay FUTA taxes by mailing a check to the IRS. The check should be made payable to "United States Treasury" and include the employer's name, address, Employer Identification Number (EIN), and the tax period.
- Electronic Funds Withdrawal (EFW): When filing the annual Form 940 electronically, employers can authorize an electronic funds withdrawal from their bank account to pay the FUTA taxes due.
Whichever method you decide to use, it's important that to make your FUTA tax deposits on time to avoid penalties and interest charges from the IRS.
Do self-employed individuals pay FUTA taxes?
Self-employed individuals don’t pay FUTA taxes. If they’re hired as contractors, their client don’t pay FUTA taxes for them either.
What is the history of FUTA?
The Federal Unemployment Tax Act (FUTA) was established in 1935 as part of the Social Security Act, creating a federal-state unemployment insurance program.
Initially, the FUTA tax was phased in at low rates, but over time the taxable wage base and tax rates gradually increased. In 1939, FUTA set a $3,000 wage base and a 0.3% net tax rate for employers in compliant states. The FUTA system has continued to evolve, with further increases to the wage base and tax rates over the decades to support the unemployment insurance program.
Do you pay FUTA for alien employees?
In general, the same rules apply for alien employees as to US citizens, according to the IRS. Their wages are subject to FUTA taxes.
What are Credit Reduction States?
If a state has an outstanding unemployment insurance loan from the federal government that has not been repaid for two consecutive years as of January 1, the state is considered a Credit Reduction State.
In these cases, the maximum FUTA tax credit available to employers in that state is reduced by 0.3% each year until the loan is repaid. This means employers will have to pay a higher effective FUTA tax rate. As of December 26, 2023, only New York and California have Credit Reduction State status.
What’s the role of FUTA in global hiring and compliance?
While the Federal Unemployment Tax Act (FUTA) is a US-specific regulation, it can impact global companies with employees based in the United States. Multinational organizations must ensure they comply with FUTA requirements for their American workforce, even as they manage unemployment insurance contributions in other countries where they operate.
Understanding the FUTA system is crucial for global businesses to maintain compliance with local tax laws and avoid steep penalties, legal action, and damaged company reputation.
In severe cases of FUTA noncompliance, businesses may face audits, fines, and other legal challenges from the IRS. This can disrupt global hiring and workforce management efforts, so it’s essential for multinational employers to stay up-to-date on FUTA regulations and deadlines.
Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.