FUTA
FUTA is the Federal Unemployment Tax Act, a federal payroll tax that funds unemployment insurance programs and is paid entirely by the employer, never withheld from an employee’s wages. The standard FUTA rate is 6.0% on the first $7,000 of each employee’s wages per year, though most employers qualify for a credit that lowers the effective rate to 0.6%.
How the FUTA credit works
Employers report and pay FUTA using Form 940, filed annually, though deposits are often due quarterly once accumulated liability crosses a threshold. Most employers who pay their state unemployment tax on time and in full receive a FUTA credit of up to 5.4%, which brings the effective FUTA rate down from 6.0% to 0.6% on the same $7,000 wage base, a maximum of $42 per employee per year. Employers in a small number of states with outstanding federal unemployment loans, known as credit reduction states, receive a reduced credit and pay a higher effective FUTA rate until the state repays its loan balance. Missing state unemployment payments or filing them late can also reduce or eliminate the credit for that employer, raising their FUTA liability even though the state tax was eventually paid.
FUTA vs FICA and SUTA
FUTA differs from FICA and SUTA in who pays it and what it funds. FICA is split between employer and employee and funds Social Security and Medicare; FUTA and SUTA are both unemployment taxes, but FUTA is federal and paid only by the employer, while SUTA is a state-level unemployment tax whose rate depends on the employer’s industry and claims history, sometimes called an experience rating. A business can owe FUTA in every state it has employees in, since it is a single federal tax with one $7,000 wage base per employee regardless of state, while SUTA is calculated separately for each state where the employer has payroll. Independent contractors reported on a 1099 are not employees for unemployment tax purposes, so FUTA and SUTA generally do not apply to payments made to them.
FUTA is one of the federal taxes an employer must file and deposit on schedule, on top of every state unemployment return. WageTime files every federal, state, and local tax automatically, including deposits, so FUTA and SUTA filings happen without a manual deadline calendar.
See how WageTime automates tax filingFrequently asked
Does FUTA come out of an employee’s paycheck?
No. FUTA is an employer-only tax; it is never withheld from an employee’s wages, unlike FICA, which is split between employer and employee.
Do all employers owe FUTA?
Most employers who paid $1,500 or more in wages in any calendar quarter, or had at least one employee for part of a day in 20 or more weeks, owe FUTA; a few narrow exemptions apply to certain nonprofit and agricultural employers.