FUTA Explained: Understanding the Federal Unemployment Tax Act

Do you pay wages of $1,500 or more to your employees in a calendar quarter? If so, you may be responsible for paying the Federal Unemployment Tax Act tax annually. These taxes may be one of the smaller payroll taxes, but they fund a key safety net and come with rules employers can't ignore.

What Is FUTA?

The Federal Unemployment Tax Act (FUTA) established a program to assist states in covering unemployment benefits for workers who lose their jobs through no fault of their own. Understanding the FUTA tax meaning is simple: If you paid $1,500 or more in wages during any calendar quarter, or you had at least one employee working part of a day in 20 or more weeks in the current or previous year, you are required to pay this tax annually.

This obligation is in addition to state unemployment insurance, often referred to as SUTA. Together, FUTA and SUTA fund unemployment insurance programs that provide temporary income to eligible employees who have been terminated for reasons beyond their control. In short, the FUTA tax definition comes down to an employer-paid tax designed to stabilize the workforce by supporting unemployment benefits nationwide.

What Is the State Unemployment Act (SUTA)?

The State Unemployment Tax Act, or SUTA, is a state-level tax paid by employers to fund unemployment compensation. FUTA and SUTA are both employer taxes, but FUTA is managed and collected by the IRS at the federal level. At the same time, SUTA is administered separately from FUTA and managed and collected by individual state governments.

Each state develops its own state unemployment insurance taxes, or SUI taxes, independently, to determine how much employers must contribute through payroll deductions. FUTA contributions typically go toward benefits for employees who lose employment after being laid off due to events outside their control, such as death or illness in the family. On the other hand, SUTA funds unemployment benefits for individuals who have lost their jobs due to reasons outside their control, which may vary from state to state. For example, if Colorado has considerably less work available for its residents than California, Colorado may have a higher SUTA to ensure unemployment coverage is available for all the people struggling to find jobs. Employers in all states are therefore required to pay both FUTA and SUTA contributions according to applicable regulations to ensure adequate funding of all state unemployment insurance programs across the country.

What Is Unemployment Insurance?

Unemployment insurance is a program managed by the federal government through FUTA. This program provides financial assistance to employees and their families who have been laid off due to no fault of their own. The money distributed comes from taxes collected from employers quarterly under FUTA, which helps cover the costs of managing unemployment. This assistance is available for up to 26 weeks or until the individual finds a new job or achieves self-sufficiency. It helps provide some financial relief, allowing individuals to continue supporting themselves and their families during periods of unemployment.

Who Pays FUTA Taxes and How Does It Work?

The Federal Unemployment Tax Act (FUTA) requires that employers — not employees — pay the tax directly to the federal government. Employees do not pay FUTA tax, and nothing is withheld from their paychecks. The tax applies only to the first $7,000 of wages paid to each employee (excluding any wages exempt from FUTA). This wage threshold has been in effect since 1983, and can only be changed by an act of Congress.

Self-employed individuals do not pay FUTA tax. For example, if you are a partner, there is no FUTA on your distributive share of partnership profits. Likewise, if your business engages independent contractors, FUTA does not apply to those payments.

In addition to the general rules, employers must also understand the reporting requirements that determine whether FUTA applies in different work arrangements:

• General Test: Most businesses meet this test if they paid $1,500 or more in wages in any calendar quarter, or if they had at least one employee working any part of a day in 20 or more different weeks during the year.
• Household Employee Test: If you paid a household worker (like a nanny or caregiver) cash wages of $1,000 or more in any calendar quarter, you must pay FUTA tax.
• Farmworker Test: Agricultural employers must pay FUTA if they paid cash wages of $20,000 or more to farmworkers in any calendar quarter, or employed 10 or more farmworkers for at least part of a day during 20 different weeks in the year.

These tests help clarify who pays FUTA tax and ensures that employers in different industries and circumstances meet their obligations under the law.

Who Is Exempt From FUTA Taxes?

According to the Federal Unemployment Tax Act, employers who pay wages to household employees, including nannies and housekeepers, but do not meet the $1,000 threshold are not required to pay taxes. Additionally, various organizations, including religious groups and government entities, are exempt from FUTA. Furthermore, if an employer pays wages totaling less than $1,500 per quarter for all quarters of the previous two tax years, then they may also not be required to pay FUTA.

Organizations with a 501(c)(3) tax-exempt status are also not subject to FUTA, which means that many nonprofits are automatically excluded from this federal requirement. Employers may also qualify for exemptions from FUTA tax if they did not employ anyone for at least part of a day in 20 or more different weeks during the current or previous two tax years.

Employers who meet these criteria fall under exemptions from FUTA tax, making it clear which wages and payments are exempt from FUTA tax and which ones remain subject to the law.

FUTA Tax Rate 2025

The FUTA tax rate for 2025 starts at 6%, but most employers qualify for a credit of up to 5.4% for timely payment of state unemployment taxes. This reduces the net federal rate to 0.6%. When applied to the first $7,000 of each employee's annual wages, the maximum FUTA tax is $42 per employee. This rate has remained steady since the expiration of the 0.2% surtax in 2007. However, it's important to remember that employers in credit reduction states may pay more if their state has outstanding federal unemployment loans.

Employers must meet eligibility tests — such as paying $1,500 or more in wages during any quarter or employing at least one worker for part of a day in 20 different weeks during the year — to determine if FUTA applies.

To see how the FUTA rate applies in practice, consider this example:

In both the $30,000 and $10,000 examples, only the first $7,000 of wages are subject to FUTA tax, which caps the obligation at $42 per employee. Employers often compare the FUTA tax rate 2024 with the current year's figures to track changes, but the rate and wage base remain unchanged for 2025.

Employers should also be aware of credit reduction states. If a state has borrowed from the federal government to cover unemployment benefits and hasn't repaid the loan, the usual 5.4% credit is reduced. This increases the effective FUTA tax rate for employers in that state. Each year, the Department of Labor publishes a list of credit reduction states so businesses can adjust their calculations.

FUTA Tax Credit

Under the Federal Unemployment Tax Act, most employers qualify for a credit that significantly reduces their FUTA taxes. This credit allows employers to subtract up to 5.4% of FUTA-taxable wages from the standard 6% rate, bringing the effective tax rate down to 0.6% when filing Form 940. To qualify, employers must pay their state unemployment taxes on time and in full.

For example, if an employee earns $7,000 in a year:

• $7,000 × 6% FUTA tax = $420
• Minus 5.4% credit = $378
• Net FUTA owed = $42

This simple calculation shows how the FUTA credit reduces employer costs while ensuring compliance. In some states, however, the credit may be reduced if the state has outstanding federal unemployment loans. In those cases, the effective FUTA tax owed will be higher than the standard 0.6%.

FUTA vs. FICA

FUTA, which is for unemployment benefits for employees, should be distinguished from FICA, which is a separate tax paid by both employers and employees to provide Social Security and Medicare benefits.

The FICA tax is 6.2% on taxable compensation up to a fixed amount annually (e.g., $176,100 in 2025) for the Social Security portion and 1.45% of taxable compensation for the Medicare portion (without any limit).

The employer and the employee pay the same amount. For example, if an employee earns $50,000, the employer's FICA tax is $3,825 (6.2% of $50,000 + 1.45% of $50,000). The employee pays the same $3,825, which is withheld from their wages.

How To Calculate FUTA Tax Liability

Figuring out how to calculate FUTA tax liability as an employer may seem complicated at first, but it's possible to streamline the calculation by following a few key steps.

1. Calculate the total wages paid to all employees for the previous quarter. If this number is greater than $1,500, you must pay taxes under FUTA and should continue on to step 2.
2. For each employee, multiply the current FUTA tax rate (6.0% for 2025) by the amount of wages paid to the employee, up to a maximum of $7,000 annually.

For example, if a company has 35 employees who each make at least $7,000 in a single year, the total summary of eligible wages paid would amount to $245,000 ($7,000 x 35 = $245,000). Multiplying this total by 6.0% results in a FUTA liability of $14,700 ($245,000 x .06 = $14,700). This tax liability does not include any SUTA liability that may also be due from the employer.

Please note that the above calculation shows the liability before the tax credit is taken out. Employers typically have a credit of 5.4% that they need to account for.

Paying FUTA Tax

Under the Federal Unemployment Tax Act (FUTA), employers must generally deposit their FUTA tax quarterly if the liability exceeds $500. If your liability is $500 or less in a quarter, you carry it forward to the next quarter until the total exceeds $500, at which point a deposit is required. If your liability never rises above $500 for the year, you may pay the balance when filing your annual Form 940.

All deposits must be made electronically through the Electronic Federal Tax Payment System (EFTPS). This ensures timely payments and accurate records with the IRS.

When Are FUTA Taxes Due?

FUTA taxes must be paid each year on or before the last day of the month following the end of the calendar quarter for employers who have at least $500 in cumulative liability. This means that FUTA taxes are due quarterly, with payment deadlines occurring on January 31, April 30, July 31, and October 31.

The following table outlines the FUTA deposit due dates:

This schedule helps employers stay on track with their FUTA deposits and avoid late payment penalties.

Reporting FUTA Tax

The tax is reported on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. The return must be filed if:

• You paid wages of $1,500 or more to employees in any calendar quarter during the current or previous year.
• You have one or more employees for at least some part of a day in any 20 or more different weeks in the current or previous year.

Special rules apply to employers of agricultural workers. They are provided in the Instructions to Form 943. Form 940 must be filed by January 31 of the year following the year to which it relates (e.g., January 31, 2026, for 2025).

Returns can be mailed or e-filed. If you aren't sure how to calculate, file, or meet your FUTA obligations, a tax professional can help.

Doing Payroll Taxes Correctly Is Important

Employers must understand how payroll taxes, including FUTA, work. Employers must pay their full FUTA liability before their filing date each quarter to remain compliant with federal regulations and avoid potential financial penalties. Failing to withhold or manage payroll taxes properly can lead to costly legal penalties, fines, and a tarnished corporate reputation.