What Is Federal Unemployment Tax (FUTA)?

Running a business comes with plenty of responsibilities, and  payroll taxes are one of the big ones that can cause confusion. You’ve probably heard terms like FUTA, SUTA, and FICA tossed around, but knowing what each one means — and how it applies to your business — is key to staying compliant and avoiding penalties.

In this article, we’ll break down the meaning of FUTA, who pays it, how it’s calculated, and how it impacts your business. By the end of this guide, you’ll understand what FUTA is, how it works, and how to stay compliant.

What Is Federal Unemployment Tax?

The Federal Unemployment Tax Act (FUTA) is a federal law that requires employers to pay a payroll tax to help fund unemployment benefits at the federal level. This tax, often called FUTA tax, is not withheld from employees’ paychecks. Instead, it’s 100% an employer-paid tax.

The money collected through FUTA goes into a federal fund that supports state unemployment insurance programs, extended benefits during times of high unemployment, and the administrative costs of running these programs. Without FUTA, states wouldn’t have the financial backing needed to support workers who lose their jobs through no fault of their own.

In short, FUTA provides a safety net for workers while placing the responsibility of funding that safety net on employers.

What is unemployment insurance?

Unemployment insurance (UI) is a program that provides temporary financial assistance to eligible workers who have lost their jobs. It’s not intended to replace a full paycheck, but it helps workers cover basic expenses while they search for new employment.

UI is primarily run at the state level (through SUTA taxes), but FUTA ensures that states have consistent federal support. The federal and state systems work together to provide a stable source of funding for unemployment benefits across the country.

Who is responsible for paying Federal Unemployment Tax?

Most businesses are required to pay FUTA taxes if they meet the IRS “general test.” You’re subject to FUTA tax if you:

• Paid wages of $1,500 or more to employees in any calendar quarter, or
• Had at least one employee (full-time, part-time, or temporary) for at least some part of a day in 20 or more different weeks during the year.

There are also specific rules for household and agricultural employers:

• Household employees: You must pay FUTA if you paid $1,000 or more in cash wages to a household worker in any calendar quarter. Household workers include babysitters, housekeepers, and gardeners.
• Agricultural employees: You must pay FUTA if you paid $20,000 or more in cash wages to farmworkers in any calendar quarter, or if you employed 10 or more farmworkers during 20 or more weeks in a year.

Nonprofit organizations with 501(c)(3) status, state and local governments, and tribal governments are generally exempt from FUTA. Self-employed individuals and independent contractors are not subject to FUTA either.

FUTA vs FICA

FUTA is often confused with FICA, but they serve very different purposes.

• FUTA (Federal Unemployment Tax Act): Paid only by employers to fund unemployment insurance programs. Employees do not pay FUTA.
• FICA (Federal Insurance Contributions Act): Shared by both employers and employees, this tax funds Social Security and Medicare programs. Employees see FICA withheld from their paychecks, and employers must match those contributions.

Think of it this way: FUTA helps workers who have lost their jobs, while FICA supports workers in retirement, disability, or healthcare coverage.

How to calculate FUTA

The FUTA tax rate for 2025 is 6% on the first $7,000 of wages paid to each employee each year. This $7,000 is called the FUTA wage base.

Here’s an example:

• FUTA rate = 6%
• Wage base = $7,000
• FUTA owed per employee = $420 ($7,000 x 6%)

However, most employers qualify for a credit of up to 5.4% if they pay their state unemployment taxes on time. With the credit applied, the effective FUTA rate is reduced to 0.6%.

That means in most cases, employers pay no more than $42 per employee per year in FUTA tax.

It’s important to note that some states are designated as credit reduction states if they borrow money from the federal government to pay unemployment benefits and fail to repay it. In these states, employers may pay a higher FUTA rate because the credit is reduced. For 2025, California, New York, and the Virgin Islands are credit reduction states.

How is FUTA paid?

Even though FUTA is calculated annually, it must be paid throughout the year. Here’s how it works:

• If your FUTA liability for the quarter is more than $500, you must deposit the tax by the quarterly due date.
• If your liability is $500 or less, you can carry it forward to the next quarter until your total liability exceeds $500.
• If your total liability for the year is $500 or less, you can pay it when you file your annual return.

Quarterly payments are due on:

• April 30 (for Q1)
• July 31 (for Q2)
• October 31 (for Q3)
• January 31 (for Q4 of the prior year)

Employers make payments through the Electronic Federal Tax Payment System (EFTPS). FUTA taxes are reported annually on IRS Form 940, the Employer’s Annual Federal Unemployment Tax Return. The form is due January 31, but if you’ve paid all your FUTA tax on time, you get a 10-day grace period to February 10.

FAQs: Federal Unemployment Tax

What is FUTA?

FUTA is a federal tax employers pay to fund unemployment benefits. The 2025 FUTA tax rate is 6% on the first $7,000 of wages per employee, with a maximum credit of 5.4% for state unemployment taxes paid.

Who pays FUTA?

Only employers pay FUTA tax. It is never withheld from employee paychecks.

Which businesses pay FUTA?

Most businesses must pay FUTA if they pay $1,500 or more in wages during any calendar quarter or have at least one employee for 20 or more weeks in a year. There are special rules for agricultural and household employers.

Nonprofit organizations with 501(c)(3) status, state and local governments, and tribal governments are generally exempt from FUTA. Self-employed individuals and independent contractors are not subject to FUTA either.

What happens if businesses don't pay FUTA?

Failure to deposit FUTA taxes on time can lead to IRS penalties ranging from 2% to 15% of the unpaid amount, plus interest.

Conclusion

FUTA may not be the largest payroll tax your business pays, but it’s an important one. It ensures your employees have access to unemployment benefits if they lose their job and helps keep your business compliant with federal law.

Staying on top of FUTA is just one piece of payroll compliance, but understanding how it works makes it far less intimidating. By calculating correctly, paying on time, and filing Form 940 each year, you can avoid penalties and keep things running smoothly.