Federal Unemployment Tax Act (FUTA)

What is FUTA?

FUTA, formally known as Federal Unemployment Tax Act, is a federal law mandating a payroll tax on employers to fund unemployment benefits for laid-off workers. Unlike Social Security Tax that shares the burden for payment between employers and employees, FUTA lays the whole burden on the boss with employees not contributing a dime. The IRS collects this tax, which goes into a federal trust fund from which individual states draw in order to pay eligible persons unemployment insurance (UI) benefits. As of 2025, the tax rate is 6% on the first $7,000 of wages paid to each employee, but most employers receive a tax credit that reduces it to 0.6% as long as they pay into state unemployment programs on time. 

The Purpose of FUTA

FUTA’s whole deal is to create a safety net for workers who get laid off or otherwise lose their jobs through no fault of their own. The tax dollars flow into the Federal Unemployment Trust Fund, which the U.S. Department of Labor oversees. States then use this cash—along with their own unemployment taxes—to hand out benefits, helping people pay bills while they hunt for new work. It’s a team effort: FUTA covers admin costs and loans to states when their UI funds run dry, while state programs handle the actual payouts. Think of it as a backup plan to keep the economy steady when jobs take a hit. 

How is FUTA Tax Calculated?

Calculating FUTA tax is simple, and it mirrors the payroll tax vibe from your Social Security reference—just employer-side only. Here’s the breakdown:  

1. Figure Wages: Take each employee’s total wages for the year, but only the first $7,000 counts (called the wage base).  

1. Apply the Rate: Multiply that $7,000 by 6%—that’s $420 per employee before credits.  

1. Claim the Credit: If you pay your state unemployment taxes on time (usually by January 31 for the prior year), you get a credit up to 5.4%, slashing the FUTA rate to 0.6% ($42 per employee).  

1. File and Pay: Employers report it annually on Form 940 (more on that below) and send the tax to the IRS, usually via the Electronic Federal Tax Payment System (EFTPS). 

You only pay FUTA on employees—not independent contractors—and only if you hit certain thresholds: paying $1,500+ in wages in any quarter or having at least one employee for 20 weeks in a year. 

Key Details for FUTA

• Who Pays: Employers only—no employee withholding like FICA. Applies to businesses, farms (if wages hit $20,000+ in a quarter), or households (domestic help wages of $1,000+ per quarter).  

• Wage Base: Fixed at $7,000 per employee since 1983—no inflation adjustments like Social Security’s cap.  

• Form 940: The “Employer’s Annual Federal Unemployment (FUTA) Tax Return” is how you report it. Due January 31, but you get till February 10 if you’ve paid all tax owed by then.  

• Deposits: If your FUTA tax exceeds $500 for the year, pay quarterly (April 30, July 31, October 31, January 31). Under $500? Pay it all with Form 940.  

• State Credit: The 5.4% credit hinges on timely state unemployment tax payments. Miss the deadline or owe state UI “loans”? Credit shrinks, and FUTA costs climb.