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.
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.
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.
Most businesses are required to pay FUTA taxes if they meet the IRS “general test.” You’re subject to FUTA tax if you:
There are also specific rules for household and agricultural 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.
FUTA is often confused with FICA, but they serve very different purposes.
Think of it this way: FUTA helps workers who have lost their jobs, while FICA supports workers in retirement, disability, or healthcare coverage.
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:
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.
Even though FUTA is calculated annually, it must be paid throughout the year. Here’s how it works:
Quarterly payments are due on:
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.
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.
Only employers pay FUTA tax. It is never withheld from employee paychecks.
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.
Failure to deposit FUTA taxes on time can lead to IRS penalties ranging from 2% to 15% of the unpaid amount, plus interest.
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.