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TAXES

FUTA

FUTA is the federal unemployment tax you pay on the first $7,000 of each employee’s wages a year, with nothing withheld from pay.

Updated 4 min read4 primary sources

LAW
Federal Unemployment Tax Act, 26 U.S.C. §3301
RATE
6.0%, or 0.6% after the full credit
CAP
First $7,000 of each employee’s wages a year
WATCH FOR
Late state payments shrink your FUTA credit

The Federal Unemployment Tax Act funds unemployment insurance programs. The rate is 6.0% of the first $7,000 you pay each employee in a calendar year. Pay your state unemployment tax on time and in full, and you generally earn a credit of up to 5.4%. Outside credit reduction states, that brings the net rate to 0.6%, at most $42 per employee a year. You pay all of it yourself and never withhold FUTA from an employee’s wages. You report it yearly on Form 940Form 940. Form 940 is the IRS annual return reporting the federal unemployment (FUTA) tax you owe on the first $7,000 a year of each employee’s wages.Click to open the term.

What are the rates?

A credit reduction state is one that borrowed from the federal government to pay unemployment benefits and did not repay in time. That means an outstanding loan balance on January 1 of two consecutive years, not repaid by November 10 of the second year. Its employers get a reduced credit and pay a higher net rate. You report that on Schedule A (Form 940).

PIECERATEAPPLIES TO
FUTA tax6.0%First $7,000 of wages per employee a year
State unemployment creditUp to 5.4%State tax paid on time and in full
Net rate0.6%At most $42 per employee a year, outside credit reduction states

Work it out: one year of FUTA

Enter each employee’s pay for the year and the part exempt from FUTA tax, then your state’s taxable wages, experience rate, and the state tax you paid before and after the Form 940 due date. The card caps each employee at the wage base and works the credit through the Form 940 worksheet.

WORKED EXAMPLE

One year, three employees: the state tax paid after the Form 940 due date

26 U.S.C. §3302
Pay for the yearFUTA taxes the first $7,000 of each employee’s pay after exempt payments
Employee A
Taxable FUTA wages: $7,000.00
Employee B
Taxable FUTA wages: $7,000.00
Employee C
Taxable FUTA wages: $7,000.00
Exempt paymentsTaxable, up to $7,000Above $7,000, not taxedThe $7,000 cut-off
Taxable state wagesThe wages your state unemployment tax applied to
$
State experience rateThe rate your state assigned you
%
State tax paid on timePaid by the Form 940 due date: full credit
$
State tax paid latePaid after the Form 940 due date: 90% of the credit
$
Taxable FUTA wages$21,000.00Form 940, line 7
State credit$1,085.40Of up to $1,134.00 (5.4%)
FUTA tax for the year$174.60Form 940, line 12 (2025 form)
All state tax paid by the Form 940 due date$126.00
As entered$174.60
Paying $648.00 of state tax late adds $48.60 of FUTA taxState tax paid after the Form 940 due date earns only 90% of the credit. Paid on time, the year’s FUTA tax would be $126.00.
$48.60more for the year

FUTA tax for one calendar year, one state, and up to three employees, following Form 940 lines 3 to 12 and the line 10 worksheet of the 2025 instructions: 6.0% of each employee’s pay up to the wage base after exempt payments, less a state credit of up to 5.4%, with state tax paid after the Form 940 due date earning 90% of its credit. It leaves out credit reduction states and employers in more than one state (Schedule A), the tests for who owes FUTA, including household and agricultural employers, 501(c)(3) organizations, and state and local government employers, and quarterly deposits. Other cases and state law can change the result.

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Who owes FUTA?

You owe FUTA if you paid wages of $1,500 or more in any calendar quarter, this year or last. You also owe it if an employee worked part of a day in 20 or more different weeks, this year or last. Household and agricultural employers use their own tests. Section 501(c)(3) tax-exempt organizations generally don’t owe FUTA. Independent contractors are not employees for unemployment tax purposes, so FUTA generally does not apply to payments made to them.

Depositing and filing

You deposit FUTA by electronic funds transfer, such as the Electronic Federal Tax Payment System (EFTPS). If your FUTA tax is $500 or less in a quarter, carry it over to the next quarter. Once the cumulative tax is more than $500, deposit it.

  • Month-end after the quarterDeposit by April 30, July 31, October 31, or January 31; a weekend or holiday moves it to the next business day.
  • Fourth-quarter deposit dateAny extra FUTA from a credit reduction is due; for 2025, that was February 2, 2026.
  • February 2, 2026Form 940 for 2025 is due, or February 10 if you deposited all FUTA when due.
  • Penalty deadline: Form 940 due datePay state unemployment tax after it, and the credit on that payment is limited to 90% of normal.

Frequently asked

No. Only employers pay FUTA tax, so you never collect or deduct it from an employee’s wages. FICA works differently. You withhold the employee’s share of FICA and pay a matching share yourself. FUTA is a cost you carry on the first $7,000 of each employee’s wages a year.

SOURCES
  1. Instructions for Form 940 (2025)
  2. 26 U.S. Code § 3301 - Rate of tax
  3. 26 U.S. Code § 3306 - Definitions
  4. FUTA credit reduction

General information, not legal or tax advice. Apply current federal and state rules with qualified guidance.

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